TAX POLICY AND FOREIGN DIRECT INVESTMENT (FDI)

IN NIGERIA

BY:

DANLADI KAMAL MOHAMMED

MEC/41616/133/DF

A Thesis submitted to the College of Higher Degrees and Research in Partial Fulfillment of

the Requirements for the Award of Master of Arts in Economics

Of Kampala International University

Kampala, Uganda

May,2015

DECLARATION A

"This thesis is my original work and has not been presented for a Degree or any other academic

award in any University or Institution of learning"_

Signature~~-~ ----~---- - Name of the Candidate Danladi Kamal Mohammed

Approval

"I confinn that the work reported in this thesis was carried out by the candidate under my

supervision" .

Name of the Supervisor Dr. ISAAC MO KONO ABU GA

Sign~l;.£. .. .. . . . ... . . ~ .

Date: J~ ly eJ ~

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DEDICATION

I dedicate this thesis to my late parents' Malam Mahammadu kado and Malama Saadatu Ali may

their soul rest in perfect peace Amin.

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ACKNOWLEDGEMENTS

First and foremost i would like to thank the almighty God for the gift of life and health that he

has given to me to make me be able to write this research work. I would also like to acknowledge

the assistance and role played by the following personalities to the successful completion of this

study. I thank my late parents may their soul rest in peace for sacrificing the little they had, in

thick and thin and invested in my education. Thank you for looking after me and enabling me to

acquire a lifelong investment. I also thank my best friend and Brother Baffa Yahaya for his

financial assistance during my programme in Kampala International University (K.I.U).

I cannot s.1y exactly how grateful. I am to my supervisor Dr.Abuga Isaac whose guidance in this

study was beyond mensure tlrnnk you for guiding me with patience and o.lso for providing me

with professional advice.

I cannot forget the efforts of staff of Kampala International University especially lecturers of

College of Business and Management for their input and effort that made me acquire the

invaluable knowledge.

[n the same way. I \Votilcl like to thank the management and staff of Central Bank of Nigeria

(CBN) ABUJA. federal ministry of finance Abuja Nigeria National Bureau of Statistics Abuja

Nigeria for their time given to me.

L.1stly [ would like to acknowledge my wives. sons and daughters for their patience during my

study at Kampala International University Uganda.

IV

CTL

EU

FDI

FIRS

GDP

GFCF

NBS

MAT

MNEs

OECD

PAYE

PIT

FIRS

SMES

SPSS

U.K

CBN

U.S.

NRA

LIST OF ACRONYMS AND ABBREVIATIONS

Commercial Transaction Levy

European Union

Foreign Direct Investment

Federal Inland Revenue Services

Gross Domestic Product

Gross Fixed Capital Formation

National Bureau of Statistics

Minimum Alternate Tax

Multinational Enterprises

Organization for Economic Co-operation and Development

Pay As You Earn

Personal Income Tax

Federal Inland Revenue Sen,ice

Small and Medium Enterprises

Special Package for Social Scientists

United Kingdom

Central Bank of Nigeria

United States

Nigeria Revenue Authority

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VAT

VIF

OVTEST

Value Added Tax

Variance Inflating Factor

Omitted Variable Test

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LIST OF TABLES

Table 4.1 Summary of All Variables Exercised in this Study

Table 4.2 Descriptive Statistics of FDI the Dependent variable and the Independent variables

Table 4.3 Trend ofFDI inflow in Nigeria between 1984 and 2014

Table 4.4Trend of Tax Incentives in Nigeria between 1984 and 2014

Table 4.5Trend of Corporate Tax Rates In Nigeria between 1984 and 2014

Table4.6The main Categories of Tax Incentives in Nigeria

Table 4.7Sumrnary ofFDI inflow. Tax Rate, Tax Incentives and GDP (1984 -2014)

Table 4.8 Pearson Correlation of the Independent Variables v-,1ith the Dependent variables

Table 4.9 Correlation value among Independent variables

Table 4.10 VIF value among Independent Variables

Table 4.11 Linktest calculation

Table 4.12 Shapiro Wilk Test on Normality Problem

Table 4.13 Regression Estimation using Robust Standard Error

Vil

LIST OF FIGURES

Figure 2.1 conceptual frame work

Figure 4.1 Trend ofFDI inflows in Nigeria 1984 to 2014

Figure 4.2 Trend of Corporate Tax Rates In Nigeria between 1984 and 2014

Figure 4.3 Trend of tax incentive in Nigeria 1984 to 2014

VIII

ABSTRACT

The study investigated the influence of tax incentives, tax rate on the foreign direct

investment in the period 1984-2014. The model is derived from eclectic paradigm

theory. It can be understood from this theory the main factors that driven FDI inflows

have been the need to receive market access, the opportunities presented by large scale

privatization process and the degree of political and economic stability. The researcher

utilized secondary data of 30 years. Data points and data have been taken from

UNICTAD Annual reports World Bank development reports, central bank of Nigeria

CBN publication on monetary policy. CBN Annual Report and statement of account

and federal ministry of finance reports. The trend of each of the above mentioned

construct variables have also been examined in the study to show their movement and

changes between (the independent variable) tax policy and foreign direct investment

(dependent variable) in Nigeria. The researcher used Pearson Linear Correlation

Coefficient (PLCC) and ordinary lenst square (OLS) regression analysis. To examine

the trend of the research variables line graphs have been employed. The study findings

showed the trend of tax incentive in Nigeria in the study period were fluctuations fi·om

time to time. Tax incentives in million of Naira has experienced a decreasing and

increasing trend. In summary form tax incentive from 1984-1986 was declining then

from 1987-1993 ,,vere a general rising trend of tax incentive in Nigeria. Fluctuations

from time as that of tax incenti\'es. [n summary form the FDI intlov, of Nigeria has

experienced an increased trends in some shorter year for instance 1992 the FDI inflmv

raised to 42, 624from 111, 730 in 1991.

The research concluded the tax policy as presented by tax incentives and tax rate ,vhich

were the main focus of this study. Based on the research finding the researcher

concluded the tax policy presented by tax incentive and tax rate have positive

significant effect on FDI ini10\v in Nigeria. The researcher also recommenclecl based on

the empirical quantitative analysis that tnx rate has a significant and negative impact on

FDI inflow accordingly. lowering tax rate accompanied by tax procedure simplification

,vill increase FDI inflow and a tax incentive policy showed be planned and managed

appropriately.

IX

TABLE OF CONTENTS

DECLARATION A

DECLARATION B

DEDICATION

ACKNOWLEDGEMENTS

LIST OF ACRONYMS AND ABBREVIATIONS

LIST OF TABLES

LIST OF FIGURES

ABSTRACT

TABLE OF CONTENTS

CHAPTER ONE

INTRODUCTION

1.0 Introduction

1.1 Background of the Study

1.1. l Historical and Global Perspectives

1.1.2 Theoretical Perspective

1.1.3 Conceptual Perspective

1.1.4 Contextual Perspective

1.2 ProblemStatement

1.3 General Objective

1.4 Objectivesof the study

1.4 .1 Specific objective

1.5 Research Questions

1.6 Research hypothesis

1.7 Research Scope

1.7.1 Geographical Scope

1.7.2 Content Scope

1. 7 .3 Theoretical Scope

1.7.4 Time Scope

1.8 Significance of the Study

1. 9 Operationa I Definition of Key Words

1.10 Study Limitations

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CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.0 Introduction

2.1 Conceptual Framework

Figure 2.1: Conceptual Framework

2.2 Theoretical Review

2.2.2.1 Foreign Direct Investment Theory

2.2.2.2 Capital Market Theory

2.2.2.3 Theories Assuming Perfect Market

2.2.2.4 Theories Assuming Imperfect Market

2.2.2.5 The Eclectic Theory

2.3Foreign Direct Investment

2.4 Tax Incentives and Foreign Direct Investment (FDI)

2.5 Policy Arguments for Tax Incentives in Attracting FDI

2.5 Tax Policy

2.7 Challenges Faced by Developing Countries in Tax System

2.8 Tax Administration and Data

2.9 Gaps in the Literature

CHAPTER THREE

METHODOLOGY

3.0 Introduction

3.1 Research Design

3.2 Data Collection Techniques

3.3 Data Analysis

3.3.1 Statistical method

3.3.2 Variables descriptions and measurement

CHAPTER FOUR

PRESENTATION ANALYSIS AND INTERPRETATION OF DATA

4.0 Introduction

4.1.1 Foreign Direct Investment (FDI) Inflow as Dependent Variable

4.1.2 Tax Incentives

4.1.3 Tax Rate

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4.1.4 Gross Domestic Product (GDP) Growth

4.2 Descriptive Analysis

Source: World Bank (2015); Central Bank ofNigeria (2014)

Source: World Bank (2015); Central Bank ofNigeria (2014)

4.6 Basic Assumption Test

4.6.1 Multicollinearity

4,6.2 Omitted Variable Test

4.6.3 Normality Test

4.6.4 Autocorrelation Test

4.6.5 Heteroscedasticity Test

4. 7 Relationship between Tax Policy and FDI Inflow

4.8 Statistical Test for OLS Model

4.8.1 GDP Growth

4.8.2 Tax Rate

4.8.3 Tax Incentives

CHAPTER FIVE

SUMMARY, OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

5.0 Introductions

5.1 Summary of Findings

5.2 Conclusions

5.3 Recommendations

REFERENCES

APPENDICES

APPENDIX 1 A: TRANSMITTAL LETTER

APPENDIX 18: TRANSMITTAL LETTER FOR THE ORGANIZATIONS

APPENDIX II: CLEARANCE FROM ETHICS COMMITTEE

APPENDIX III: INFORMED CONSENT

APPENDIX VI: TIME FRAME FOR RESEARCH PROJECT

APPENDIX VII: RESEARCH BUDGET

APPENDIX VIII: RESEARCHER'S CURRICULUM VITAE

APPENDIX IX: TREND OF FDI NET INFLOWS TO NIGERIA 1984 - 2014 (US$)

APPENDIX X: NIGERIA'S GDP GROWTH (1984-2014)

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APPENDIX XI: TAX RATE IN NIGERIA 1984 - 2014 101

APPENDIX XIII: SUMMARY OF ALL VARIABLES EXERCISED IN THIS STUDY 105

XIII

1.0 Introduction

CHAPTER ONE

INTRODUCTION

Considerable effort and attention in most developing and mid-developed countries is devoted to

tax policies best suited to influencing foreign direct investment (FDI), \Nhich is believed to be

pivotal in the promotion of economic development. The major focus of these efforts is the

formulation and implementation of desirable fiscal policies ,vith considerable stress being placed

on the role of tax policies as an instrument of promoting FDI. Tax policy has always been an

important instrument for augmenting revenue. This is as true in developing countries as in

developed countries. where tax revenue is the major source of domestic revenue. This paper

empirically analyzed the relationship between Nigeria's tax policies and foreign direct

investment (FDI) in the country. Tax policy was the independent variable w"hilst FDI was

dependent variable. This chapter covers background to the study. statement of the problem,

objectives of the study. research questions Ztnd hypotheses. justification. significance and scope

of the study and limitations.

1.1 Background of the Study

I.LI Historical and Global PcrspcctiYCs

Tnxation ts an important issue today as tt was in the past and it \viii be in the future. The lirst

detailed information about taxation can be found in Ancient Egypt. This means. the origin of

taxation policies can be traced in the Ancient Egypt around 3000-2800 BC in the first dynasty of

the Old kingdom (Keen & Mansour. 20 I 0). The earliest and most widespread form of taxation

was the corvee and tithe . This was a form of forced labor provided to the state by peasants too

poor to pay other forms of taxation. Therefore, labour in ancient Egypt is a synonym for taxes).In

the earliest times, countries were confronted with similar problems as we are today. For example,

the pharaohs searched for ways to reduce corruption of their tax collectors called scribes (Adam

1993). This was inscribed the famous Rosetta Stone at around 200 B.C during the reign of

Ptolemy, which did not only help to maintain the hieroglyphic knowledge but is also the first

"tax-oriented" documentation, which reports a tax amnesty, where tax rebels were released from

prison, remitting them also the tax debts. The success of the tax amnesty increased the incentive

to use this instrument as a regular medicine to check civil disorder (Adams 1993).

Since 1980, FDI inflow in the world has rapidly increased, especially to developing counh·ies. It

reached culmination point around the year 2007 where global FDI inflows attained USD 2.3

billion. After experiencing a declining during the period of 2001 -2003 , FDI inflows began to

show an upward trend in 2005 -2007. Unfortunately, after then it showed a declining trend until

2009 . In 2010, global FDI inflow reached an estimated $1,244 billion with a little increase from

level of $1,185 billion (Sources: www.unctad.org/fdistatistics). However, there was an uneven

pattern between regions and also between sub-regions. FDl inflows to developed countries and

transitional economies contracted further in 20 I 0. In contrast. those to developing economies

recovered strongly, and together with transitional economies for the first time surpassed the 50

per cent mark of global FDI flows (UNCTAD. 2012).

In this age of globalization. most African countries seek to become integrated with the

international economy. However, they face significant challenges in this pursuit, including the

need to increase tax revenues. Hence tax policy makers have to analyze the prevailing conditions

2

in the country and determine the relevant mix of taxes that can influence FDI and thus, raise

sufficient revenue for national development. Many Sub-Saharan African (SSA) countries,

Nigeria included, have increasingly restructured their tax systems for this specific purpose.

Despite numerous tax reforms that were intended to improve the economic and social situation,

the rate of growth FDI has remained low, fragile, and the country remains on the list of the mid­

developed countries in the world.

Africa's natural resources account for the uneven spread of FDI inflows across the continent and

the 24 countries in Africa classified by the World Bank as oil and mineral-dependent have on

average accounted for close to three-quarters of annual FDI flows over the past two decades

(UNCTAD, 2005). Nigeria share of net FDI in 1990 was 588 million Dollars accounting 24.19%

of African countries but this however declined in 21.07% in 1995, 14.43% in 1997, 8.22% in

1999, 5.88% in 2001 and 7.98% in 2006. In spite of the abundance of natural resources in the

country, the investment response has been poor even with the economic reforms aimed at

creating an investor-friendly environment. Col.lier and Patillo (1999) argued that FDl is lmv in

Africa because of the closed trade and unfriendly tax policies and corruption. Other scholars

have however. contended that most African countries' tax policies lack do not offer tax

incentives to effectively attract larger inflows of FDI even in the primary sector (Lall, 2004 ). Lall

sees the lack of "attractive tax incentives·• in Africa as cutting it off from the most dynamic

components of global FDl inflows in all sectors.

In order to achieve uniformity in the system of taxation throughout Nigeria. the colonial

Government set tip the Raisman Commission in 1958. This Commission recommended the

introduction of uniform basic income tax principles. for application in all the regions of Nigeria .

.,

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The recommendation was accepted by GovernmenL which incorporated same, into the

Constitution of the Federal Republic of Nigeria. This led to the promnlgation of the Income Tax

Management Act, 1961 and The Companies income Tax Act, 1961. These legislations were later

repealed arid re-enacted as The Personal Income Tax Act CAP P8 FN 2004 and The Companies

Income Tax Act CAP C21 FN 2004, respectively. As a result of the reassessment carried out by

the law Review Commission, these laws have been reviewed and codified, and are included in

the laws of the Federal Republic of Nigeria 2004.

The adoption of the macroeconomic programme embedded in the SAP started the process of

gradual increase in the FDI inflow in Nigeria. The period 1990 and 1993 witnessed a drop in

the rate of inflow largely due to a protracted political impasse that disrupted productive

activities and created a regime of uncertainty, which subsequently encouraged capital flight.

In 1995, in order to improve on the level of uncertainty and liberalise the investment climate

in the country, the government promulgated the Nigerian Investments Promotion Commission

Act cap n.117 ( 1995 ), LFN .(NIPC). The aftermath of the promulgation of the commission

was a momentous increase in the FDI inflow into the country especially into the non-oil

sectors.

In the recent years, government of this oil-rich Nigeria. which has for a couple of years been

hobbled by political instability. corruption, inadequate infrastructure. and poor macroeconomic

management hindering economic development and grO\vth began pursuing economic reforms.

Major interests were FDI as a means of achie,,ing economic growth. In this effort. a National

Council on Privatisation was established. in addition the Nigerian Investment Promotion Council

(NIPC) and. has been strengthened to serve as a one- stop office for clearing all the requirements

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for investment in Nigeria. This has been through attracting FDI through taxation policy in form

of tax incentives is an avenue bei11-g adopted.

Taxes in Nigeria can broadly be divided into two categories: direct and indirect taxes. The major

direct taxes for 2011/2012 in Nigeria were: Pay As You Earn (PA YE), corporate taxes, and

withholding taxes (Murgatroy et al., (2013). Indirect taxes include the Value Added Tax (VAT),

which is a consumption tax, as well as import duties and excise taxes imposed on international

trade and locally manufactured goods. The authors state that these taxes were introduced to meet

Nigeria's broad tax policy objectives that include: establishment of a semi-autonomous revenue

authority, enacting new laws, and rationalizing the overall tax structure.

Lyakurwa (2003) has stressed macroeconomic policy failures as deflecting FDI inflows in Africa.

According to Lyakurwa, irresponsible fiscal policies have generated unsustainable budget

deficits and inflationary pressures, raising local production costs, generating exchange rate

instability and making the region too risky a location for FDI. In addition, excessive levels of

corruption, regulation and political risk all associated with tax policies are also believed to have

further derail FDI, adding to an unattractive business climate for FDI.

Ngowi (2001) points out that the main factors preventing an increased inflow of FDI in Africa is

that most countries are regarded as high risk because they are characterized by a lack of political

and institutional stability. Additional factors that are cited as hindrances to prospective FDI

include poor access to world markets. price instability. high levels of corruption, small and

stagnant markets and inadequate infrastructure. Morrisset (2000) suggests that the most

important features of African countries successfully attracting FDI are strong economic growth

and aggressive trade liberalization. Other important factors include privatization programs. the

5

modernization of mining and investment codes, the adoption of international agreements relating

to FDI, a few large priority projects which have significant multiplier effects, and a high-profile

image-building exhibition involving the head of state.

1.1.2 Theoretical Perspective

This study was guided by the Theory of Foreign Direct Investment (FDI), Dunning (1993)

electronic paradigm as sited in Dunning (2011) suggested that the main factors that drive FDI

inflows have been the need to secure market access, the oppmtunities presented by large scale

privatization processes and the degree of political and economic stability; and the Capital Market

Theory by Greta Garbo that was fonnulatecl in 2007, which explains the dynamic

macroeconomic Foreign Direct Investment theory. It emphasizes that the timing of the

investment depends on the changes in the macroeconomic environment.These theoriesaided the

researcher to understand why companies participate in FDI, what FDisconsider when

selectingone destined country over the others, and why they prefer a specific entry mode tohost

countries (Moosa, 2002). This theory fmther enabled the researcher to understand the

relationship between tax policy incentive provisions and FDI from a host country point of view

and why one country succeed in attracting FDI while others remain stagnant in FDigrowth, what

incentives are more preferable to investors in establishing attractiveinvesting environment.

1.1.3 Conceptual Perspective

Tax policy is an administrative apparatus that is built to levy and collect tax. through applying

different tariff and basis taxation, in order lo apply policy that has built (Slemrocl, 2000). Tax

policy is concerned with the reasoning behind how much revenue the government is collecting,

6

what the revenue is being used for, and whether the government is collecting revenue in the most

appropriate way.

On the other hand, Foreign direct investment (FDI) is a direct investment into production or

business in a country by an individual or company in another country, either by buying a

company in the target country or by expanding operations of an existing business in that country

(Agosin, 2009a). Broadly, foreign direct investment includes "mergers and acquisitions, building

new facilities, reinvesting profits earned from overseas operations and intra company loans". In a

narrow sense, foreign direct investment refers just to building new facilities. It is often argued

that countries are less vulnerable to external financing difficulties when ctment account deficits

are financed largely by FDI inflows. rather than debt-creating capital flows (Dean et al.. (2011 ).

According to Nwankwo (2006), FDI creates employment and acts as a vehicle of technology

transfer, provides superior skills and management techniques, facilitates increases product

diversity. Ayanwale (2007) stated that most countries strive to attract FDI because of its

acknowledged advantages as a tool of economic development. This view is supported

by Nwankwo (2006) study on Nigeria which stated that FD I is an engine of economic grovvth and

development in Africa where its need cannot be over emphasized. Nigeria joined the rest of the

World in seeking FOi as evidenced by the [n view of the NEPAD initiative. the government is

working toward developing stronger public-private partnerships for roads, agriculture. and power

through the attraction of FOi among other measures.

Taxation is the bedrock of a Country to fulfil its responsibility and ensure its continuity.

According to Modugu, Eragbe and lzedonmi (2012), taxation goes hand in hand with economic

grow1h and lifeblood for governments to deliver essential services and to make long-term

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investments m public goods. However, sometime, government waives taxes 111 exchange for

certain gains. This is done in form of tax incentives as a provision of the prevailing tax policy.

Therefore, as pait of the efforts to provide an enabling environment that is conducive to the

growth and incentives for various sectors of the economy. However, the tax sensitivity of FDI

has important policy implications.

Although the potential importance of the need to attract FDI in the development process cannot

be over-emphasised, two fundamental issues concerning FDI are critical. These include the

determinant factors of FDI in a typical host country, whether these factors are under the control

of the host country and not subjected to the manipulations of FDI countries.

Scholars assert that FDI inflows generally provide a more stable source of external financing

than private debt and portfolio equity flows. And there is no gainsaying the importance of FDI

inflows for its contribution to sustaining current account imbalances in countries such as

Pakistan, South Africa and Turkey, where the value of FDI inflows is estimated to have covered

their entire current account deficit in 2007. But this is only part of the story. As governments

employ some incentives in form of taxation so as to attract foreign investors, there is need to

finds out the extent to which these two variables are related especially in case of Nigeria.

FDI has played a crucial role in business internationalization. Massive changes have taken place

both in terms of size, scope. and methods of FDI in the last decade. These changes occur

because of developments in technology. relaxing restrictions on foreign investment barriers in

many countries, as well as deregulation and privatization of many industries. Development of

information technology systems, as well as. more affordable cost in global communication

allows foreign investment to be managed easier.

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Based on the data provided by the Word Development Indicators (WDI), it is known that the FDI

inflow into Nigeria was still low tn 2005 standing at 1,-005 million Dollars. Although it happened

to increase in the subsequent years 2006, 2009 and 2012, it was still lower compared to other

countries in the same development bracket, which means that there was a capital flight.

Exercising a tax policy for instance tax incentives in enticing foreign direct investment is not a

new method. According to M01isset and Pimia (1999), when other factors such as infrastructure,

cost of production, economic and political stability are more or less equal, tax regulation may

have a significant effect on choices. This effect varies, however, depending on the tax

instrument used, the characteristics of the multinational company, and the relationship between

the tax systems of the home and recipient countries.

In a more competitive world, exercising a tax policy, tool or incentives to attract FDI has become

a global phenomenon. Some countries in Asia and Afiica rely on tax holidays and import duty

exemptions to entice FDI while those in Western Europe prefer to apply accelerated depreciation

(UNCT AD, 1995). This competition will encourage Nigeria to enact tax policy regulations that

tend to be more beneficial for FDI companies than achieving its tax revenue target. However,

there should be a balance that might lead the country to win both tax revenue target and FOi

inflow. This research sees to analyze the relationship between tax policy and FDI in Nigeria

using a quantitative method. It focused on tax policy provision as tax incentive determinant

factors in attracting FDI inflows in Nigeria. The researcher also included some other

determinant factors as control variable such as GDP growth as a proxy for market size. Gross

Fixed Capital Formation (GFCF) as a proxy for infrastructure. trade openness as a proxy for

government policy inflation as a proxy for economy stability and tax rate.

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1.1.4 Contextual Perspective

Nigeria has the potential to become Sub-Saharan Africa's largest economy and a major player

in the global economy because of its rich human and material resources. With its large

reserves of human and natural resources, Nigeria has the potential to build a prosperous

economy, reduce poverty significantly, and provide the health, education, and infrastructure

services its population needs. However this has not been achieved because all major

productive sectors have considerably shrunk in size with the over dependence on oil. Income

distribution is so skewed that the country is one of the most unequal societies in the world,

with 50% of the population having only 8% of the national income (Adaora, 2006).

He futther posits that the economy remains highly uncompetitive and with an average annual

investment rate of barely I 0% of GDP, Nigeria is far behind the minimum investment rate of

about 30% of GDP required to unleash a pove1ty-reducing growth rate.Most of the FDI in

Nigeda goes into the oil and extractive sectors and the economic structure remains highly

undiversified, with oil accounting for 95% of exports (USAID 2003). However, the Nigerian

government has acted to stimulate non-oil businesses through the promotion of Small and

Medium Enterprise (SME). These effmts and the momentum provided to the nation by the

return of a democratic government are reflected in the '"Improvement and Optimism Indexes"

compiled by the World Economic Forum "s Africa Competitiveness Rep01t (2000-2001 ),

which ranks Nigeria fomth among 12 African countries in terms of improvement and first, in

terms of "'optimism'' (AFDB/OECD 2003: Ari yo 2004 ).The Federal Inland Revenue Services

(FIRS) has disclosed that the implementation of the new national tax policy for the country

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has commenced following the approval of the final draft of the regulation by the Federal

Government which was gazette on September 21, 2012.

Commenting on Transfer Pricing regulation in Nigeria, Bamidele noted that the regulations

gave effect to the provisions of-(a)section 17 of the Personal Income Tax Act, CAP P8, Laws of

the Federation of Nigeria, 2004 (as amended by the Personal Income Tax (Amendment) Act,

2011 );(b) section 22 of the Companies Income Tax Act, CAP C2 l, Laws of the Federation of

Nigeria, 2004 (as amended by the Companies Income Tax (Amendment} Act 2007; and (c)

section 15 of the Petroleum Profit Tax Act, CAP 13, Laws of the Federation of Nigeria. 2004.

The objectives, according to him, include: to ensure that Nigeria is able to tax on an appropriate

taxable basis corresponding to the economic activity deployed by multinational enterprises in

Nigeria, including in their transactions and dealings with associated enterprises; to provide the

Nigerian authorities the tools to fight tax evasion through over or under-pricing of controlled

transactions between associated enterprises etc.

The country has remained ahead of several other African economies in offering incentives and

creating a favorable environment for foreign investors. In spite of the discouragement caused by

the political instabilities in the n01thern part of the country. foreign investors still find Nigeria a

favorable place for investment (Fjeldstad and Moore. 2009). This has been enhanced by the

government's effo1ts to attract investors through many favorable investment policies. However,

there is a lot of concern on in the recent years that a range of factors need to be taken into

consideration to attract and sustain FOi on the Nigerian economy (Wade. 2010). Besides the

quality of labor, standard of living, skills, human resource retaining capacity of the local market,

one of the biggest issues has been that of tax policy since many of the donors have ,vithclrawn

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their support to the country and the country has to tussle is budget through revenue generated

from local tax (Wade, 2010). It is therefore through this fact that tlris study is attempting to

investigate the relationship between tax policy and FDI in Nigeria.

1.2 ProblemStatement

A good tax policy can significantly attract FDI in any country. This can be achieved through tax

revenue reduction inform of tax incentive. This however, can be counterproductive if care is not

taken for many reasons. Adeola (2011) opined that it is note-worthy to emphasize that there is

enormous untapped investment opportunities that exist in the Nigerian economy for the

investment appetite of both local and foreign investors.

Despite Adoela's (201 I) argument, investments particularly FDI is perceived to be potentially

significant to promote economic growth. In addition, the presence of foreign capital can be a

source of technological development, expmt growth and employment. Therefore, countries like

Nigeria are very enthusiastic and eager to attract FOL One of the factors influencing FOi that is

still controversial in the country is tax policy, a policy that provides for a form of tax incentive

facilities. Accordingly, there is a need to have more empirical evidences about the relationship

between tax incentive policy and FDI. Better understanding on the issue will allow government

and policy maker to design better policies in attracting FDI. This study therefore seeks to

empirically examine the relationship between the tax policy incentive provisions and FOI inflow

in Nigeria.

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1.3 General Objective

The broad objective of this study is to analyze the relationships between tax rate, tax incentives,

GDP growth and foreign direct investment in Nigeria.

1.4 Objectives of the study

1.4.1 Specific objectives

The specific objectives are to:

1. Examine the relationship between tax incentive and foreign direct investment in Nigeria.

11. Examine the relationship between tax rates and foreign direct investment in Nigeria.

111. Examine the relationship between GDP growth and foreign direct investment in Nigeria.

1.5 Research Questions

Based on the above problem statement this study seeks to answer the following research

questions;

1. What is the relationship between tax incentive and foreign direct investment in Nigeria?

11. What is the relationship between tax rates and foreign direct investment in Nigeria?

111. What is the relationship between GDP growth and foreign direct investment in Nigeria?

13

1.6 Research hypothesis

The research study employs individual test hypotheses that identifies which of the set of

independent variables are significant predictors of dependent variable. That is it tests the

independent variables individually rather than as a unit.

Tax incentive has no significant relationship on FDI inflow in Nigeria (ie ~1 = 0)

Tax rate has no significant relationship on FOi inflow in Nigeria (ie ~1 = 0)

GDP Growth has no significant relationship on FOi inflow in Nigeria (ie B1 = 0)

1.7 Research Scope

1.7.1 Geographical Scope

This study was carried out in Nigeria, the country has been chosen for this study because it has

many foreign investors carrying out different forms of business. Thus, finding relevant and

appropriate secondary data will be much easier.

1.7.2 Content Scope

While there are many determinant factors of FD!. the present study focused on tax policy as

determinant factor in attracting FOi inflow in Nigeria. To have a robust empirical result in

14

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---···········~--~···········~·········~···········

pe1forming the quantitative method using Pearson's linear correlation coefficient and Ordinary

Least Square, technique the researcher consider GDP growth, Tax rate and tax incentives as the

constructs t independent variables.

1.7.3 Theoretical Scope

This research study is guided by Dunning (1987) proposed a theoretical framework to examine

the relationship between fiscal policies and the flow of investments from a foreign country to a

host country and institute as electronic theory. According to the theory, there are foreign country

to host country. There must be advantage the investor company, the host country must have a

location advantage to be able to attract investors to invest their capital and their must be a

stimulus in internalizing factor that encourages firms or foreign investors to invest directly in the

form of FDI. The study is also guided by several Garbo capital market theory (2007) explains the

dynamic Macro economic foreign direct investment theory which emphasis that the taming of

the investments depends on the charge of microeconomic environment.

1.7.4 Time Scope

Regarding the time frame of this research, in qualitative analysis of tax policy regulations. the

researcher picked out regulation from government gazette enacted in 1961 to the current one in

2004. However. in performing the quantitative estimation the researcher only included data from

period 1984 to 2014 considering the data availability.

15

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1.8 Significance of the Study

Given that the study examines the relationship between tax policy and FDI in Nigeria, it is hoped

that the findings and recommendations may be of use to various pat1ies in different ways.

(i) To Nigeria Federal Inlands Revenue, it will provide an insight on the extent to which the

prevailing tax rate and tax incentives influence FDI in Nigeria.

(ii) To policymakers, the findings will be used as principle guide in formulating new or

amending existing tax policy provisions for including tax incentives / holidays.

(iii) To FD Investors and the entire business community in Nigeria, it will serve as an

instrument and report paper for betterment of the existing tax policy and policy

provisions that will drive them to investing in Nigeria (FDis) and growing their

businesses (local investors) thus, addressing their grievances.

(iv) To the general public, it will benefit them through improved and increased service

delivery and provision of public good either in the short or long run.

(v) To other academicians, it will add on the existing body of knowledge in the literature

relating to taxation and FDI and, for better understanding of the subject under study,

scholars will make use of the findings and recommendations of this study to carry out

further research.

1.9 Operational Definition of Key Words

Tax policy is an administrative apparatus that is built to levy and collect tax. through applying

different tariff and basis taxation, in order to apply policy that has built. Tax policy in this study

16

was measured in terms of effectiveness of tax incentives; tax administration, and tax policy

convemence.

Foreign direct investment (FD/) is a direct investment into production or business in a country

by an individual or company in another country, either by buying a company in the target country

or by expanding operations of an existing business in that country. FDI was measured through

the scope of FDI; human resource development; technological development and level of

employment opportunities.

1.10 Study Limitations

One of the major limitations of this study is cost analysis of tax policy regulation in attracting

FDI inflow due to the difficulty in both data source and complicated calculation. However, the

idea of cost analysis of tax holiday can be a subject of further research after knowing the

relationship and impact of tax policy incentives on FDI inflow.

Since the researcher did not collect the data he has no control over ·what is contained in the data

as used in the study was secondary data from both national and international organizations.

17

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CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.0 Introduction

The following chapter elaborates the theoretical review; then illustrates the conceptual

framework showing the interaction between the study variables.

2.1 Conceptual Framework

Figure 2.1: Conceptual Framework

Independent Variable

Tax Policy • Tax Incentives • Tax Rates • GDP growth

Intervening Variables • Inflation • Trade Openness • GFCF

Dependent Variable

Foreign Direct Investment

Income distribution

Government

Source: Adopted from Greta Garbo (2007): Modified by the Researcher

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t

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II• . I

I I'.·,,:. ' . I·.' •

I m;

Figure 2.1 indicates the effectiveness in tax policy in regards to GDP growth tax incentive. tax

rate and other control variables (inflation, trade openness and GFCF) in influencing FDI inflow

in Nigeria. However, this relationship can be affected if cases of corruption, civil wars, and weak

government policies are not well streamlined.

2.2 Theoretical Review

A number of theories have been developed to explain the determinants of FDI. Extensive

reviews of the main FDI theories and determinants of FDI range from the FID theory. economic

theories of Vernon (1966), the internationalization theory of Rugman (1981), Dunning·s (1993)

electronic theory and Greta's capital market theory (2007).

2.2.2.1 Foreign Direct Investment Theory

The fast growing and reliability of FDI compared to other capital instruments has brought

interest to the development theory of FDI. Some FDI theories tried to explain why companies

participate in FDL what are the considerations of selecting one destined country over the others,

and why they prefer a specific entry mode to host countries. From the host country point of

views, other FDr theories explained why one country succeed in attracting FDI while others

remain stagnant in FDI growth. what incentives are more preferable to inveswrs in establishing

attractive investing environment. According to Moosa (2002), theories of FD! can be classified

into four types: (1) Theories assuming perfect market; (2) theories assuming imperfect market:

(3) other theories: ( 4) theories based on other variables. The following section will discuss in

detail each of theory.

19

2.2.2.2 Capital Market Theory

The Capital Market Theory as formulated by Greta Garbo (2007) explains the dynamic

macroeconomic Foreign Direct Investment theory. This theory emphasizes that the timing of the

investment depends on the changes in the macroeconomic environment. As taxation is an issue

connected to macroeconomics, this theory becomes relevant to this study as its variables include

tax policy and foreign direct investment.

In establishing a clear understanding between tax policy and FDI, Logue (2009) presents Capital

market theory in relation to taxation and professional investors' ability to forecast future

earnings. According to him, there is no significant difference between the average investment

performance of the well-informed and the uninformed investors. If there were, the differences in

performance between and within the two groups of investors should be due to chance. There are

tests of security prices and returns predictability based upon several explanatory variables such

as dividend yields, term-structure of interest rate, quarterly earnings reports, calendar effect, day­

of-the-week effects, price-earnings ratios effect, price-to-book ratios effect, size effect. and

trading volume effect. Since this theory sets its emphasis on taxation and investors ability to

forecast the future and these are also the variables on which this study is centered on, the theory

becomes relevant principle to guide this study.

2.2.2.3 Theories Assuming Perfect Market

There are three hypotheses under this theory: (]) the differential rate of return~ (2) the

diversification of hypothesis; (3) the output and market size hypothesis.

20

The gist of differential rate of return hypothesis is that capital flows from the country with a

lower rate of return to the country \.\Tith a higher rate of return and eventually leads to equality of

the real rate of return. In this hypothesis, business risk is assumed to be neutral regardless

investing location, making real rate of return as an isolated variable in investment decision.

Business risk neutrality means that an investor considers foreign market as perfect substitution of

the domestic market. As this represents one of the first efforts in elaborating FDI theory, many

researchers have tested this hypothesis by examining the relationship between FDI inflow and

rate of return in several countries. Unfortunately, most of them failed to provide suppo1ting

evidence relevant to this hypothesis (Agarwal, 1980}.

Yang (1999) in his research on FOi in China between rich coastal area and poor inland area

attempted to adjust the role of rate of return by inputting human capital variable. The result

suggested that majority FDI in china flows to rich coastal area even though poor inland area

offers a higher rate of return. Perhaps, human capital adjusted the differential rate of return effect

between rich coastal area and poor inland area.According to Moosa (2002), the failure in

suppo1ting this hypothesis. arose from inconsistency of this hypothesis. This is because in this

hypothesis. capital only flows in one direction, which is from a lower rate of return country to a

higher rate of return country. This hypothesis fundamentally failed in explaining why countries

like Nigeria experiences inflow and outflow of FDI simultaneously even if it has a higher rate of

return than others.

In portfolio hypothesis, investors do not only consider rate of return. but also incorporate risk of

business in investment decision. This hypothesis postulates investment as a positive function on

rate of return and a negative function on risk of business. When risk of business is included. then

21

investment diversification becomes relevant. Rather than selecting countries exclusively on

-higher rate of return, capital mobility now also flows by desire to n111111mze risk by

diversification. While some scholars identified some loopholes in this theoretical hypothesis, the

theory itself is preferable to differential rate of return hypothesis for some reasons. First, it

considers business risks which constitute vital element in business decision. Second, it proposes

logical reason on the existence of cross investment intra countries.

2.2.2.4 Theories Assuming Imperfect Market

Several hypotheses fall under this theory such as the industrial organization hypothesis, the

internalization hypothesis, the location hypothesis. the eclectic theory. the product life cycle

hypothesis and the oligopolistic reaction hypothesis.

According to this theory, when a multinational company establishes a subsidiary outside its

home country, it will encounter many disadvantages when competing with domestic company.

These disadvantages derive from various differences in culture, language, the legal system. and

manyinter-country differences. For example. foreign companies more often have to pay higher

wages for the same quality workers since working with them is associated with high risk and

uncertainty. It happens to language differences as well, as foreign companies should bear extra

cost to overcome the language barrier. Therefore. in order to deal with these disadvantages,

foreign companies must possess some advantages among which are tax incentives provided by

the prevailing tax policy of a receiving country. These comparative advantages should be innate

advantages that can be easily transferred to foreign subsidiaries and large enough to surpass these

disadvantages, (LallandStreeten, I 977)

According to this theory·s internalization hypothesis. FDI emanates to substitute market

transaction with internal transaction. This theory explains why companies prefer FDI than

exporting or importing from abroad or licensing. For example if there is a problem in production

process regarding sh01i supply in raw material, a company may decide to establish a subsidiary

company abroad in producing that raw material to ensure that raw material is available. Similar

problems might arise from imperfection and failure of market for other intermediary goods or

services such as labor, knowledge. marketing, and resource endowment. Moosa (2002)

mentioned several advantages of internalization such as avoiding of time lags, bargaining and

buyer uncertainty. In association to the time lag, bargaining and uncertainty, companies replace

some of market function for intermediary goods or services with internal process such as intra­

company transaction. For that reason, researchers claimed that internalization theory represents

the main body of FOi theory, and considered others as a subset of this theory.

2.2.2.5 The Eclectic Theory

Dunning (1987) proposed a theoretical framework to examine the relationship between fiscal

policies and the flovv of investments from a foreign country to a host country and institute it as

eclectic theory. Till today, this theory is still relevant. According to Dunning ( 1987), there are

three main aspects causing the flow of capital from a foreign country to host country. First there

must be ownership advantage of the investor company. This advantage is very specific in each

company and required as compensation to offset disadvantage a company might encounter

during investment in the host country. Ownership advantage can take the form of a monopoly on

a particular product or brand, a more efficient production processes, management skills and

greater knowledge about the market or marketing techniques. Out of those advantages. there are

also internal factors in the home country which stimulate companies to expand their operation

abroad such as unfavorable tax policies, high wage tates, increasingly expensive energy, limited

resources, and tight regulation on environment.

Second, the host country must have a location advantage to be able to attract foreign investors to

invest their capital. This advantage will be an enticement for potential investors to exploit the

existing potential advantages for the sake of business. Location advantage can be enormous

attractive tax incentives and lax policy regulation. Others include domestic potentials, high

growth, low inflation, cheap labor, abundant natural resources, and availability of infrastructure,

and lax regulation on environmental control. If the first condition is fulfilled, but the second

condition is not satisfied, investors, (in this term a multinational company), will choose to export

to host country as a way to exploit ownership advantage.

Third, although the first and second conditions are met, there must be a stimulus in internalizing

factor that encourages firms or foreign investors to invest directly in the form of FDI and not the

other way such as licensing, franchising or investment portfolio. Those three factors are a

representation of the previous three hypotheses consists of the industrial organization

hypotheses, the internalization hypothesis and the location hypotheses.

2.3Foreign Direct Investment

Feenstra and Hanson (2005) showed that foreign direct investment (FDI) has been one of the

principal beneficiaries of the liberalization of capital flows over recent decades, and now

constitutes the m~jor fonn of capital inflow for many developing countries, including low­

income ones like Chad, Mauritania, Sudan and Zambia. But while there are reasons to celebrate

24

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this success, the current financial turmoil does not bode well for the sustainability these flows in

2009.lt is often argued that countrie~are less vulnerable to extemal financing difficulties when

current account deficits are financed largely by FDI inflows, rather than debt-creating capital

flows (Dean et al., (201 I). The scholars assert that FDI inflows generally provide a more stable

source of external financing than private debt and portfolio equity flows. And there is no

gainsaying the impotiance of FDI inflows for its contribution to sustaining current account

imbalances in countries such as Pakistan, South Africa and Turkey, where the value of FDI

inflows is estimated to have covered their entire current account deficit in 2007. But this is only

pait of the story.

Wade (20 IO)noted that FD I might actually be one of the forms of cross-border flows that will be

privileged (as it has been in the aftermath to previous crises). Indeed, in a deleveraged world,

FDI may become one of the few ways in which low and middle-income countries can access

capital for development. But in the meanwhile policy makers in developing countries need to

monitor trends carefully and adapt policy accordingly. FDI is in itself no panacea. and can

sometimes compound problems during times of financial crisis. It is certainly no substitute for

enlarging tax bases and promoting better mobilization of domestic resources.

Nigeria has joined the rest of the world in seeking FDI and the country is deeply involved in the

attracting FDI in the country as a mqjor component (Fjelclstacl and Moore. 2009). The empirical

results like other previous studies confirmed that FDI impacts positively on Nigeria's economic

growth. Therefore. taking a peek at Kano State through the lens of FOL we can see that this

country is making bigger economic strides step by step and year by year. From the results. it was

recommended that in order to encourage and finance economic growth. the government should

25

continue striving to achieve a sound degree of infrastructural development, together with a good

cromestic labor force (Nigeria Federal Office of Statistics, 2012).

There are several problems facing all businesses; both domestic and foreign. These are

weaknesses in infrastructure provision, a lack of personal and property security, poor governance

and corruption. Without continued efforts in these areas, efforts on other fronts, however sound,

might have a limited impact. Reflecting such major constraints, Nigeria ranked below average in

the 2005 Transparency International Business Cm?fidence Survey among African countries

surveyed. Such a poor environment for business makes it difficult for Nigeria to increase the rate

of FDI inflows. While these factors are in a sense intangible in the business climate, their impact

is real in terms of its effect on foreign investment and consequently on the growth of the

economy.

Other elements like the complex regulatory environment, policy instability, the predominance of

state owned enterprises, and layers of business regulation at the state and local level, all

contribute to corruption by providing opportunities for patronage and intervention in private

business affairs (AFDB/OECD 2003; World Bank. 2002). [n spite of this, the table below

indicates that Nigeria still ranks amongst the top FOi receiving countries in Africa.

However with the transition to democracy and intense competition for FDl by other developing

countries, the Nigerian administration now shows a welcoming attitude to investors. The

government has aimed its most generous incentives at the sectors that present the greatest

obstacles to economic development particularly infrastructure. Nigeria is becoming investor­

friendly, with some laws allowing for 100% foreign ownership of businesses and unhindered

repatriation of capital. In addition, the gO\·ernrnent has put in place a range of incentives

16

designed to lower the cost of doing business to offset the higher-cost operating environment

arising from factors such as deficient infrastructure (Adaora, 2006).

He fm1her states that various industries have been afforded 'pioneer status', giving start-ups a

five-year tax holiday. There are 69 industries benefiting from this incentive, including mining,

large-scale commercialised agriculture, food processing, manufacturing and tomism.

Manufacturers that add value to imp011ed inputs are eligible for a five-year 10% local VAT

concession. Manufacturers using a prescribed minimum level of local raw materials, for instance,

70% for agro-allied industries and 60% for engineering industries, are entitled to a five-year 20%

tax concession.

Investors can take advantage of an infrastructure incentive that permits a 20% tax deduction of

the cost of providing infrastructure facilities that should have been provided by the government.

Such facilities include access roads, pipe-borne water and electricity supply. There is a generous

tax allowance on research and development (R&D), with up to 120% of expenditure being tax

deductible, provided that such R&D activities are carried out in Nigeria and are related to the

business from which profits are derived. In the case of research into the use of local raw

materials, the tax-deductible allowance rises to 140%. The government is also targeting

investment into some economically disadvantaged areas, extending the tax holiday available to

'pioneer status' industries to seven years and adding a 5% capital depreciation allowance.

Additional tax breaks are available for labour-intensive modes of production (Financial Times.

2005).

According to the World Bank, Nigeria's macroeconomic performance over the last two years

has been commendable. The economic reform eff011s are showing positive results including:

27

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• In 2005, growth continued to be strong at 7% for the economy as a whole and 8% for the

non-oil sector. In the first quaiter of 2006, the Nigerian economy grew by 8.3%.

• In January 2006, the country received its first credit rating (BB-) from Fitch and Standard

and Poor's.

• Year-on-year inflation fell from 28% in August to 12% by December 2005.

• A Fiscal Responsibility Bill has passed critical second readings in both the Senate and

House.

• The National Assembly is discussing a Public Procurement Refonn Bill.

• A bank consolidation prograin was implemented strengthening the financial sector and

enhancing its ability to provide credit to the private sector.

• The import tariff regime has been liberalized reducing the number of tariff bands from 19

to 5 and lowering the average tariff from about 29% to 12%.

With the deregulation of the telecommunication sector, Nigeria's telecommunications

sector is now in a rapid growth mode. According to the Nigerian Communications

Commission (NCC), there's enormous growth potential in the market, as demand for telecom

service has been high because of market liberalization and massive telecom investments. Over

recent years, all branches of the telecom industry have generated considerable growth and the

telecom industry has emerged as a main motor of the country's economy. rt is only the oil

sector that has seen more investment and telecom is novv seen as the most lucrative branch for

investment in Nigeria's economy.

As a result, Nigeria presently boasts Africa·s largest and most promising telecom market.

Even though Nigeria is trailing other countries in terms of providing phone technology at an

28

affordable pnce and doing so reliably, the market has taken significant strides m its

development (Ariyo 2005).

According to the studies caffied out by Chen (2011 )in Nigeria, it was noted that after the

1980s economic crisis, Nigeria, like other Sub-Saharan countries, recognized the need to

rationalize and harmonize the tax rates. The objectives were to attract and promote investment

in Nigeria, increase revenue yields, and simplify tax administration. This study shows that the

corporate income tax was lowered from 60% to 30% in 1997, and the maximum individual

tax rate was reduced from 60% in 1987/88 to 30% in 1993/94. The many wide-ranging

exemptions that have been granted to special sectors over the years -- including a number of

Minister's powers to exempt -- have been abolished. They include provisions granting tax

holidays under the Investment Code of 1991, which were repealed in 1997, and a provision in

the Customs Management Act empowering the Minister to grant specific waiver of taxes and

duties on imports, which was repealed in 2001.

2.4 Tax Incentives and Foreign Direct Investment (FOi)

According to (Easson. 2004), tax incentives can be defined as a special tax provision granted to

qualified investment projects (however determined) that represents a statutory favorable

deviation from a corresponding provision applicable to investment projects in general (projects

that receive no special tax provision). An implication of this definition it is any tax provision that

is applicable to all investment projects. As it has been defined above, according to statutory

regulation, tax incentive is a tax facility granted to specific investors that meet certain criteria as

stipulated in tax law. Those who are eligible benefit more than those who do not receive tax

incentives. According to UNCTAD (2000) there are different categories of tax incentives

29

commonly used by both developed countries and developing countries and these include reduced

corporate income tax rate, which can be set lowered by governments as an exception on common

statutory income tax rate to induce FDI into some regions or specific sectors; loss carry forward,

tax holidays, investment allowances, investment tax credits. reduced taxes on dividends and

interest paid abroad, preferential treatment of long-term capital gains, deductions for qualifying

expenses, zero or reduced tariffs and employment-based deductions.

These incentives are commonly targeted toward foreign investors. The rationale for increased

efforts to attract FDI stems from the belief that FDI have several positive effects on national

development indicators. Among these are productivity gains, technology transfers. introduction

of new processes, managerial skills and technical know-how in the domestic market, employee

training, international production networks, and access to markets. Empirical studies have

showed that a tax policy that puts incentives at forefront of attracting FDI is an important vehicle

for the transfer of technology, contributing to growth in larger measure than domestic

investment.

Therefore, in the face of inadequate resources to finance long-term development in Africa and

with pove1ty reduction looking increasingly bleak, attracting FOi has assumed a prominent place

in the strategies of African countries (Nwankwo. 2006). While contributing to the debate on FOi

and tax incentives, Fakile and Adegbile (201 I ) stated that it is on the basis of these asse1tions

about the advantages of FDI that governments have often provided special incentives to foreign

firms to set up companies in their countries.

Levying taxes on the transaction or business activity is one of the considerations to promote

economic efficiency. Tax neutrality requires that the tax provisions do not discriminate treatment

30

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for any activity or other economic decisions. Tax is one crucial factor for investors in

determining the decision to invest in a country. Theoretically, taxes affect investment decisions

because tax assessment influences the amount of benefits and costs. Hovvever, econometric

studies, which try to find the relationship betv,reen tax poly and FDI, ended up with inconclusive

decision smce there are many variables g1vmg influence on FDI inflow. Easson (2004)

explained the importance of tax policies in investment decision.

In the first instance. countries with high income tax rate would induce compames to invest

abroad more than countries with lower income tax rate. The logical explanation for this in te1ms

of cost of production is that high level of taxes contributes in raising labor cost and might be a

stimulus for company to dislocate its production to countries with lower cost (Easson. 2004 ).

HO\:vever, many economists refuted this explanation by claiming that taxation plays a little in

constructing the production cost. Therefore, they understate its role as the last thing to be

considered

Easson (2004) further asserts that tax provisions and tax rates factor in selecting host countries

\viii only become consiclen1tion after the decision to invest abroad has been made. However. the

main considerations for in\'estor in selecting the location are market size and political stability.

When all main considerations are relatively equal. then taxes may play important role in

investing decision.

According to Easson (2004 ), export oriented FDI is relatively more sensitive to cost factor since

international market is inherent with its high level of competitiveness. Therefore. difference in

tax rate \\1ill significantly influence investment decision. On the other hand, domestic market

31

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oriented FOi is less sensitive to tax rate difference as long as other domestic competitors bear the

same tax provision.

Majority of the studies conducted before 1990s revealed that taxation played a minor role in any

FDI decision. However, most recent studies suggested the increasingly importance of taxation in

investment decision. It seemed that the location of destination countries selected by companies

is sensitive to taxation and becoming more so over time for several explanation. According to

Easson (2004 ), there are other FDI barriers, which have been eliminated, taxation as the

remaining obstacle deserves for more consideration. Secondly, as a process of production in

multinational companies is getting globalized, it will become an international production which

involves other worldwide companies. This will increase export and import as channeling means

in the process of production. In this case, import and exp011 correspond sensitively toward tax

difference.

In support of Fakile and Adegbile (2011) and Morisset (2003) view that tax incentive is a tool to

attract FDI, Edmiston et al., (2003), opined that governments often seek to attract FDI by

offering tax incentives to firms in exchange for ce1tain benefits.

Curiously, the empirical evidence of the benefits of offering tax incentives both at the firm level

and at the national level remains ambiguous. Although trade theory expects FDI inflows to

result in improved competitiveness of host countries' exports, the pace of technological change in

the economy as a whole will depend on the innovative and social capabilities of the host country,

together with the absorptive capacity of other enterprises in the country (Carkovic and Levine,

2002).

32

Morisset (2003) asse1ts that tax incentive is a reduction in the corporate income tax rate, through

tax holidays or temporary rebates for ce1tain types of investment or companies. This is supp01ted

by Fakile and Adegbile (2011) who stated that tax incentives are pa1t of the tax policies of

developing countries and usually established and enacted by governments in order to grant

foreign investors more attractive conditions to invest in their country. Other evidence emerging

around the world suggests that tax incentives have a more apparent effect on the composition of

FDI than on its level (Morisset, 2003). Indeed, most governments use tax policies to attract

particular types of investment or to change conduct rather than to increase the overall level of

investment.

According to Morisset, the tax sensitivity of FDI has important policy implications. However, in

attracting FDI there is no doubt that more important are such factors as basic infrastructure,

political stability and the cost and availability of labour. Some empirical analysis and surveys

have confirmed that tax incentives are a poor instrument for compensating for negative factors in

but that does not mean that tax incentives have no effect on FOL

Research has shown that in recent years, there has been growing evidence that tax incentives

influence the location decisions of companies with regional economic groupings such as

European Union, North American Free Trade Area and Association of Southeast Asian Nations.

Also in the United States of America incentives can play a decisive role in the final location

decisions of foreign companies once the choices are nan-owed down to a handful of sites with

similar characteristics (Morisset. 2003 ).

In Nigeria, growing evidence shows, that tax incentives are a crucial factor for mobile firms and

firms operating in multiple markets. such as banks. insurance companies. and Internet-related

...,..., ..)..)

businesses. This is because these firms can better exploit different tax regimes across countries

FaRile and Adegbile, 2011 ). Such strategies may explain the success of tax havens in attracting

subsidiaries of global companies and the spending by multinationals on economists and

accountants to justify their transfer prices, designed to suit their tax needs. Similarly, tax rates

generally have a greater effect on the investment decisions of export-oriented companies than on

those seeking the domestic market or location-specific advantages, because such firms not only

are more mobile but also operate in competitive markets with very slim margins.

The Nigerian Government has put in place a number of investment incentives for the stimulation

of private sector investment from within and outside the country. While some of these incentives

cover all sectors, others are limited to some specific sectors. The nature and application of these

incentives have been considerably simplified. The incentives include: tax holidays, initial capital

allowance, and free duty on equipment (Fakile and Adegbile 2011 ).

Never the less, tax incentives being used to attract FDI is not the end of the story, there is the

problem of tax compliance on the part of companies. Also tax incentive has its cost. For instance

Modugu et al., (2012), expressed concern over tax compliance in their study on voluntary tax

compliance in Nigeria they opined that the need to improve voluntary tax compliance has

resulted in various tax policy reforms by various successive governments. They stated that these

reforms have not been able to stimulate the expected increase in tax revenue over the years, and

this has snowballed into a tax gap as revealed in the share of income taxes in total revenue

profile of the country.

While competition in the application of tax incentives to attract FDI already started in some

regions, most notably in Asia. the concern remains that countries may end up in a bidding war,

34

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I I

favouring multinational firms at the expense of the state and the welfare of its citizens. This risk

has pushed governments to try to harmonize their tax policies under regional or international

agreements. Beyond the risk of a bidding war, tax incentives are likely to reduce fiscal revenue

and create frequent opportunities for illicit behaviour by companies and tax administrators.

These issues have become cmcial in developing countries, which face more severe budgetary

constraints and corruption than do industrial countries.

There is no doubt that tax incentives are costly. The first and most direct costs are those

associated with the potential loss of revenue for the host government. The second is whether or

not the new investment would have come to the country if it had offered lower incentives or

none at all. If the answer is yes, free-rider investors benefit while the treasury loses, and the

economy reaps no net gains. These examples illustrate the need to clearly evaluate the welfare

implications of tax incentives, both at the level of the firm and globally.

Tax incentives also have many other, less obvious costs. Because they influence the investment

decisions of private companies. they can distort the allocation of resources. And they can attract

investors looking exclusively for short term profits, especially in countries where the basic

fundamentals (such as political and macroeconomic stability) are not yet in place. Another

problem \Vith incentive measures relates to the cost and difficulty of administering them

effectively.

Literature expressed that incentive regimes generally impose a large administrative burden. so

they must be more than marginally effective to cover the costs of their implementation and

produce a net benefit. Discretionary regimes, which rely on case-by-case evaluations, are

especially difficult to administer. These regimes result in delay and uncertainty for investors,

35

which can increase the cost of investment. They have also led to significant corruption.

effectively screened out desirable investments, and undermined sound policymaking and the

development of competitive markets. Morisset (2003) opined that to achieve the gains of tax

incentives for national development, developing countries must structure tax policies in a way so

as to attract foreign investment, without creating a negative impact in the domestic economy.

This is to ensure that they do not fall into a harmful tax competition against other countries.

2.5 Policy Arguments for Tax Incentives in Attracting FOi

Numerous arguments have been brought fo1ward for using tax policy provisions for incentives

in attracting FDI. OECD Tax Policy Studies (2001) stated several crucial arguments for using

tax incentives which can be classified as: international competitiveness, regional development,

income distribution and, macroeconomic considerations. These tax policy arguments for tax

incentives must consider other fiscal objectives like host country needs and circumstances.

These studies argue that tax incentives designed to encourage FDI, including general host

country tax relief measures, those targeted at investment in R&D. and those tied to exports, are

oftof a country, by improving its ability to attract internationally mobile capital. This view

assumes that multinational companies take tax incentives into account when making location

decisions and that tax incentives operate at the margin to swing investment decisions in favor of

the host country.

The theory of correcting for market failureposits correcting market failure as tax incentives.

This argument arises from the belief of private market failed in generating appropriate level of

investment. Therefore, government should inte1fere by introducing tax incentives. One example

36

of market failures is positive externalities in terms of companyresearch and development.

Companies, which conduct research and development (R&D) experiment, usually ignore its

positive externalities over other companies. Tax policies can play a positive role by encouraging

companies in maintaining their interest on R&D project.This can also arise on account of other

factors as well, including asymmetric information. Potential foreign direct investors may have

incomplete infom1ation on investment opp01tunities in a given host country, for a variety of

reasons. This may result in less investment in the host country than if full information were

available. In such cases, incentives might be called to promote FDI beyond the level that would

otherwise occur.

Fm1her, tax incentives policies may be targeted at investment in regions where unemployment

is a serious problem. For example, on account of remoteness from major urban centers, tending

to drive up factor costs or labor immobility or wage rigidities that prevent the labor market from

clearing. Operating from a remote area means significantly higher transpo11ation costs in

accessing production materials, and in delivering end-products to markets. placing that location

at a competitive disadvantage relative to other possible sites. Certain areas may also suffer from

a lack of natural resources. tending to put them at a further cost disadvantage.Moreover. firms

may find it difficult to encourage skilled labor to relocate and work in remote areas that do not

offer the services and conveniences available in other centers. Workers may demand higher

wages to compensate for this. which again implies higher costs for prospective investors.

In such cases. tax incentives policies may be provided to compensate investors for these

additional business costs. Where the incentives are successful in attracting new investment

and/or in forestalling the out migration of foreign capital. they may contribute to an improved

37

I

income distribution in the country. There may also exist a tax policy desire to address regional

in~ome distribution concerns through subsidizing employment through investment initiatives,

rather than through direct income supplement programs.

A tax policy that provides typically broad-based incentives has also been advocated to address a

range of macro-economic problems, such as cyclical ( or structural) unemployment, balance of

payments deficits, and high inflation. Such a policy would not be specifically targeted on FDI,

but on investment in general regardless residence. When tax incentives are used to provide

countercyclical stimulation for example, by encouraging investment and thus aggregate demand

in the economy, they are often introduced as temporary measures. Temporary incentives offer

the prospect of increased investment in the short-term while permanent incentives play in longer

term. When such measures are used, they are typically announced and then immediately

executed for better result.

2.5 Tax Policy

According toOberholzer(2008),tax policy analysis necessarily examines the nature and role of

the state, for most of the purposes of tax instruments are identical to the function of government

itself. In a sense, taxes are a necessary evil in private property regimes~ we have taxes in order

to give government entities access to cash and productive resources. From this derives the old

maxim that "taxation is one of the few things that one can be certain about."

Moesen and Persoon (2002) showed that the imposition and collection of taxes is simply one of

the fundamental policy instruments used to achieve governmental social and economic goals.

The objectives of tax policy are similar to those of public policy in developing countries. and

38

I i

overlap with the purposes of the tax system or the purpose of most governments. There are five

purposes for collecting revenue through taxes: to give government power to allocate resources;

to enable government to provide/support social development; to stabilize the economy; to

constitute and define the market place; and to encourage optimal economic growth. These are

explained below:

Bahemuka (2006} showed that the most developing countries are extremely focused on economic

growth in both the private and public sectors. According to the author, even in primarily market­

based economies, governments need to acquire assets for public sector capital fonnation and

development-related expenditures. There appears to be no limit to the tax gadgetry used in

different countries to stimulate economic growth. Most developing countries encourage foreign

direct investment to stimulate economic growth through the use of tax incentives, and many

developing countries impose higher taxes on retained profits than on distributed profits in order

to encourage distribution. However, the effectiveness of some policies -- especially of incentives

-- remains uncertain because there is still insufficient data to link such policies with growth

performance.

Bahemuka (2006) also shows that the use of ta,'( instruments to enhance economic stability is

important in developing countries because this enables them to ensure elasticity with respect to

changes in the value of money and income levels. If tax yields rise when national income rises.

governments have less need to rely on deficit financing to maintain and expand the level of

public-sector activity in a growing economy.

According to Boyatzis(2008 ). the distributional role of taxes in developing countries is another

important purpose of the tax system. The author explains that the disparities in income can block

39

development and increase demands for government social spending. The mam explicitly

redistributive tax in most tax systems is the personal income tax (PIT). In prnctice, the personal

income tax in developing countries is far from being progressive due to large disparities in

incomes. These disparities are compounded by the influence of the rich, who may end up paying

fewer taxes due to numerous exemptions or favors from the government.

2. 7 Challenges Faced by Developing Countries in Tax System

Developing countries face fo1midable challenges in trying to establish effective and efficient

tax systems. As summarized by Bakibinga (2006), the leading authority on these issues, all

developing countries have to address four basic problems: (1) the structure of the economy,

which makes it difficult to impose and collect taxes; (2) the limited capacity for tax

administration; (3) the poor quality of basic data and; (4) in many developing countries like

Nigeria, the fact that the political setup is less amenable to rational tax policy than it is in

advanced countries. Each of these basic challenges is discussed further below.

According to Anupam et al., (2000) developing countries have well-known economic

characteristics: large shares of total economic output and employment are based in agriculture~

they have relatively large informal sectors; entrepreneurial units are small and numerous: wages

form a relatively small share of total national income; and a relatively small share of total

consumer spending takes place in large modern establishments.

The bulk of literature on tax policy in developing countries tends to focus on large taxpaying

units, countering tax avoidance and evasion, and the formal economy (Anupam et al., 2000).

While those policy analysts who discuss the particular problems caused by relatively large

40

informal sectors of the economy differ in their views as to exactly what should be done about

this gap in developing countries' tax bases, they do agree that the informal sectors need to be

brought into the documentary process, and that some form of presumptive taxation may be the

best way to begin collecting revenues from the best-documented sectors.

Another characteristic of developing economies that is an obstacle to tax policy is the low

registration rate of taxpayers. According to Bird (2002), taxpayers register in low numbers either

because they do not understand their obligations or because they are deliberately evading tax.

The scholar recommends that one of the main objectives of tax administration should be to

identify and bring tax evading entities into the system. He fmiher explains that each taxpayer

should be assigned a unique number and contact details should be noted and validated. Other

government agencies like the police, land registrars, and licensing departments should also be

involved in finding tax evaders.

2.8 Tax Administration and Data

Cuccia(2004) noted that one of the challenges facing tax policy in developing countries is the

lack of efficient tax administration. In his explanation, the author showed that administrations

face major problems: a large proportion of the economy is at a subsistence level; many taxpayers

do not keep records, and even where records are kept. they are not necessarily reliable. Taxpayer

cooperation is also lo,v because of chronic shortages of trained officials. traditions of corruption,

and lack of visible improvements in government services. As a consequence. countries often

develop tax systems that exploit whatever obvious revenue-generating options they have rather

than develop modern and efficient tax systems that create wide tax bases from which to draw

41

revenue. Hence many developing countries often end up with too many small tax sources, too

heavy a reliance on foreign trade taxes, and a relatively small use of personal income taxes.

a. Gross Domestic Product Growth

One out of several key factors as FDI determinant is host market growth rate. It can be measured

by the GDP growth rate. Investors, especially foreign investors, will be more captivated in

count1ies with larger market size, as indicated by GDP growth rate which reflects the level of

potential demand.

Definition of GDP growth as World Bank (2012) clarified is the annual percentage growth rate

of GDP at market prices based on constant local currency where the aggregates are based on

constant 2000 U.S. dollars. The terminology of GDP itself is defined as the sum of gross value

added by all resident producers in the economy plus any product taxes and minus any subsidies

not included in the value of the products. It is calculated without making deductions for

depreciation of fabricated assets or for depletion and degradation of natural resources.

Various studies indicate that GDP growth is an impo1tant sign to indicate market attractiveness.

Moreover, various studies have shovvn that transaction costs would be lower in countries with

high levels of growth ( Caves, 1 971; Zhao and Zhu. 2000 ). The proposed research hypotheses

related to this variable is GDP Growth has positive effect on FDI inflow.

b. Tax Rate

There are many types of tax rate in which researchers are interested in determining the

relationship between tax rate and FOL Among those well known tax rates are statutory tax rate

which is the rate stipulated under taxation law, average effective tax rate, marginal effective tax

42

rate, and real effective tax rate. Average effective tax rate represents how taxation affects profit

after income tax imposition.

It is calculated as a percentage of income tax over accounting profit. Marginal effective ta.'< rate

measures the extent to which tax rates result in the addition of the pre-tax profit from an

investment project. Marginal effective tax rate measured to which extent income tax will

contribute to additional earning before tax in an investing project. The calculation of marginal

tax rate is by dividing the percentage of increasing or decreasing one unit of tax rate by

percentage of increasing or decreasing in earning before tax.

In this study, statutory income tax rate based on Companies Income Tax Act CAP C21 FN 2004

in Nigeria was utilized. Out of several layers of income tax rate, the highest tax rate imposed on

income will be used in this study. There are several reasons for selecting statutory income tax

rate than the others. First, statutory tax rate is the easiest way to measure tax burden level

compared to other methods. Second. statutory tax rate plays an important role in country

selection by multinational companies because companies are more likely to choose a country

with low tax rates. As such, this study hypothesizes that tax rate has a negative impact on FOi.

c. Tax Incentives

Tax incentive policy has been implemented by many developing countries and transition

economies in attracting FD! inflow. This incentive policy is intended toward new established

firm rather than currently existing companies. New companies are exempted from the burden of

income tax over a specified period of time and usually this period can be extended for a

subsequent period at a lower tax rate.

43

This study exploits tax incentive policy as a dummy variable, representing the presence or

absence of tax incentives over the period of 1984 to 2014. Taxation and investment regulation

correspond to tax incentives was analyzed to determined the year in which it is present. There are

several regulations related to tax incentives over period 1970 to 2014. First, the colonial

Government Raisman Commission of 1958, which recommended the introduction of unifo1m

basic income tax principles for application in all the regions of Nigeria, which led to the

promulgation of the Income Tax Management Act, 1961 and The Companies income Tax Act,

1961. These legislations were later repealed arid re-enacted as The Personal Income Tax Act

CAP P8 FN 2004 and The Companies Income Tax Act CAP C21 FN 2004, respectively. As a

result of the reassessment carried out by the law Review Commission, these laws have been

reviewed and codified, and are included in the laws of the Federal Republic of Nigeria 2004.

Tax incentive was measured in two ways, effective tax rate which is annual tax revenue as a

percentage of Gross Domestic Product (GDP). And also average tax rate, which is the average

of effective tax rate and presence of tax incentive. The presence of tax incentive was scored as I

and O for otherwise (Buettner and Ruf (2005); Edmiston, Mudd and Valev. 2003).

Others included political risk. which sends fear and panic that discourages investment. a secured

political environment encourages investment. This was measured by number of coup de-tat in

Nigeria as used by Ayanwale (2007) and Nwankwo (2006).

44

I r

2.9 Gaps in the Literature

This chapter has widely discussed a good amount of literature related to the subject under study

however, there still exists some gaps, which have been identified and presented hereunder. For

instance, tax incentives should be encouraged if there is mutual gain by both the host country and

FDI.

In addition, although the potential importance of the need to attract FDI in the development

process cannot be over-emphasised. two fundamental issues concerning FDI are critical. First

what are the determinant factors of FDI in a typical host country? Secondly, are these factors

under the control of the host countiy and not subjected to the manipulations of FD I countries?

While the hypothesis of differential rate of return represents one of the first efforts in elaborating

FDI theory, many researchers have tested this hypothesis by examining the relationship between

FDI inflow and rate of return in several countries. Unfortunately, most of them failed to provide

suppo1iing evidence relevant to this hypothesis (Agarwal. 1980).

Moreover, Moosa (2002) stated that, the validity of this hypothesis was questioned even on

theoretical ground. First there could be other reasons than the rate of return to explain why

companies invest abroad. Maximizing sales to reach market penetration. logical and operational

reason for benefitting resource endowment in host countries. or circumventing trade barrier are

other reasons for this capital inflow. More impo1tantly is the diversification of risk by

minimizing risk per rate of return if companies expand its operation abroad. These flaws will be

patched up by next hypothesis.

45

One method for testing the po1tfolio hypothesis is by examining the relationship of business risk

and rate of fetum on investment flow to a group of countries. However, Agarwal (1980)

concluded that empirical evidence in favor of this theory seems to be weak. For example, Steven

( 1969) in his work on aggregate direct investment to Latin America countries could not obtain

any empirical evidence in supporting this theory. Moosa (2002) concluded that some problems

might be encountered when testing this hypothesis such as: (I) risk and return are calculated

from repo1ted profit, which are absurd to be equal to actual profit for several reasons, including

accounting methods and transfer pricing; (2) risk variable cannot be accurately measured by

calculating standard deviation of historical data.

46

3.0 Introduction

CHAPTER THREE

METHODOLOGY

This chapter comprises the procedures and activities involved in drawing logical conclusions on

the research study. It deals with research design, data collection techniques of the variables and

data analysis of different validating procedure used in the study.

3.1 Research Design

This research was essentially investigative and explanatory in nature. It examined the

relationship between tax policy and foreign direct investment in Nigeria. The study was

conducted by utilizing Pearson ·s Linear Correlation Coefficient and ordinary least square

regression on time series data to observe the relationship between tax policies particularly tax

incentives and tax rate variable and GDP growth on FDI inflow in Nigeria during period 1984 to

2014. Secondary data including foreign direct investment inflow, tax incentives, tax rate and

GDP growth were collected to be used in the empirical estimation. Further analysis of the

relationship was conducted in the form of descriptive analysis, mainly describing the history of

relationship between tax policy and FDI inflow in Nigeria and. explaining the reasons behind

that relationship. In short, this chapter discusses the data collection techniques. model

specification. and data processing.

3.2 Data Collection Techniques

Secondary quantitative data were utilized in this study. Quantitative data are data in \Vhich the

containing information was expressed numerically and often analyzed mathematically by

47

implementing statistical or econometric techniques. Regarding quantitative data, this study dealt

prin1arily with secondary data in the sense that data set could easily be collected and analyzed.

Based on the aim of the research, a review of the literature suppo1ied by secondary empirical

studies was conducted. A literature review was pe1formed to identify the perf01mance

assessment methods and practices followed and prescribed in the various FDI and tax policies,

tax incentive practices and guidelines, and to determine the factors affecting FDI attractiveness.

GDP growth inclusive

The literature comprised a1ticles published in accredited journals, ruticles in popular

publications, doctoral theses and industry frameworks, guidelines and regulations. Secondary

data were therefore extensively utilized in this study. The secondary data were manually

gathered from Central Bank of Nigeria (CBN) publication on major economic, financial and

banking indicators.

Also the CBN publications on monetary policy, surveillance activities and operations, CBN

annual report and statement of account and Federal Ministry of Finance repmts, were reviewed.

Some of the data were also extracted from other responsible and annual statistical bulletin and

UNCTAD reports for 1984 to 2014.

Panneerselvam, (2006) stated that secondary data collection provides easiness in term of cost.

time and effort when obtaining the data. Secondary data are data \Vhich were already created for

the purpose of first-time use by the creator and future use for others.

In this study, quantitative data encompass foreign direct investment inflow, gross domestic

product growih, tax rate and tax incentives. Assunc;:ao. et al. (2011) categorized those indicators

48

above into several groups. Indicators such as GDP growth represent market size and

macroeconomics indicator, and finally, rax rate and tax incentives represented governmental

approach and economic incentives. Detailed explanations about those data are examined closely

below.

3.3 Data Analysis

In order to analyze the data obtained from the reviewed economic and financial reports

comprehensively, both descriptive and inferential statistics were applied. Understanding and

analyzing the overall effect of tax policy mainly tax incentives and tax rate as well as GDP

growth on the attraction of FDI in Nigeria was critical to this study, therefore, the validating

procedures were based on statistical analysis.

3.3.1 Statistical method

The statistical method used includes descriptive statistics and Karl Pearson coefficient of

correlation method of analysis. Karl Pearson's r is the most widely used in practice to measure

the degree of correlation between two series. It is typically denoted by r which is a measure of

the correlation (linear dependence) between two variables X and Y sciences as a measure of the

strength of linear dependence between two variables as per the fonnula below.

49

In samples, the value of correlation coefficient r is calculated as

r= n(IX}:) - crxH!v)

\' "' ' ipttn·>11♦ t Cf%' HdNU

Where n is the number of the data set, x and yare the variables to be related

According to Gupta (2009). among the statistical methods used for measuring the degree of

relationship, Karl Pearson method is the most popular. The correlation coefficient summarizes in

one figure not only the degree of correlation but also the direction that is whether con-elation is

positive or negative. Between two variables X and Y, giving a value between +1 and -1

inclusive, where I is total positive co1Telation, 0 is no correlation and -1 is total negative

correlation.

Furthermore, a key mathematical prope11y of the Pearson correlation coefficient is that it is

invariant to separate changes in location and scale in the two variables. Therefore, it was adopted

because of its qualities which match the expectations of this study.

The formulated hypotheses were tested with the aid of Statistical Package for Social Sciences

(SPSS).

Linear trend model was also developed to estimate the rate of change of each variable

FDI= ~o+P1GDP Growth +~2 Tax rate +p3 Tax incentives +e

50

Where Po is constant, Pt is the rate of change of the dependent variable GDP Growth, ~2 is the

rate of change of the dependent variable tax rate, ~3 is the rate of change of the dependent

variable tax incentives and E is the error tea

3.3.2 Variables descriptions and measurement

Unlike the earlier studies by Ayanwale (2007); Nwankwo (2006); Buettner and Ruf (2005), this

study attempted to empirically shed light on the critical response or behavior of FDI towards the

prevailing tax policy on tax incentives and tax rate and GDP growth in the major sectors of

Nigeria's economy.

These statistics are oft.en disclosed in the financial reports of Central bank of Nigeria. Thus. all

the tax incentives, tax rates, GDP growth and economic statistics on FDI measurement data were

obtained manually from the annual audited financial reports of the CBN. Copies of their 1991 to

2012 annual reports were reviewed and adequately analyzed.

Two categories of variables were used in this study; these were~ I st) the independent variable -

Tax policy as an attracting measure such as tax incentives, tax rate and other tax policy measures

of attraction FDI and the GDP growth 2nd) the dependent variable FDI in Nigeria. The FOi

variable was based on the actual figure of FDI in Nigeria during the period under review. The tax

policy measures of attraction \Vere viev.red from several dimensions of tax policy.

All the variables were extracted from the actual performance figures reported in the CBN and

UNCTAD annual reports betvveen 1991 and 2012.

51

CHAPTER FOUR

PRESENTATION ANALYSIS AND INTERPRETATION OF DATA

4.0 Introduction

This chapter discusses the c01relation results of Pearson Linear Correlation Coefficient and the

estimation results of Ordinary Least Square regression analysis, which represents the relationship

between dependent variable (FDI Inflow) and Independent Variable Tax Policy as it concerns

(Tax Rate, Tax Incentives and GDP Growth, using time series data for year 1984 - 2014. Further

descriptive analysis related to historical tax incentives and tax rate regulation is presented

subsequently.

4.1 Summary of all Variables Exercised in this Study

Table 4.1: Summary of all Variables Exercised in this Study

Variable Explanation Unit Source

Dependent Variable:

FD! Inflow Net foreign investment us$ World Development

to Nigeria Indicator

Independent Variable:

Tax Incentives The presence or absence Dummy Variable Nigeria's Regulation

of Tax Incentive (Tl) (Tax Policy)

Provision in the tax

policy represented by:

I for presence of TI

0 for absence of TI

Tax Rate Highest Statutory tax % Nigeria's Regulation

rate according to (Tax Policy)

Nigeria's Tax Policy

GDP Growth GDP Growth as % World Development

percentage increase or Indicator

decrease of Nigeria's

I !

4.1.1 Foreign Direct Investment (FDI) Inflow as Dependent Variable

Dependent variable in this study is FDI inflow. Refen-ing to the (World Bank, 2012), FDI data in

this study refer to FDI net inflows (new investment inflows less disinvestment) in Nige1ia as the

reporting economy from foreign investors. Application ofFDI inflow in this study was impoitant

for comparison to other studies since most of studies about FDI utilized this variable as

independent variable.

4.1.2 Tax Incentives

Tax incentive has been implemented by Nigerian government in attracting FDI inflow. This

incentive is intended toward new established firm rather than currently existing companies. New

companies are exempted from the burden of taxes over a specified period of time and usually this

period can be extended for a subsequent period at a lower tax rate. This study exploited tax

incentive as a dummy variable. representing the presence or absence of tax incentives over the

period ofl 984 to 2014.

4.1.3 Tax Rate

While there are many types of tax rate in which different researchers are interested. the current

study was interested in statutory tax rate to determine the relationship between tax rate and FDI

m Nigeria. This is the rate stipulated under Nigerian Tax policy. Others were the average

effective tax rate, marginal effective tax rate. and real effective tax rate. Average effective tax

rate represents how taxation affects profit after income tax imposition. It is calculated as a

53

percentage of income tax over accounting profit. Marginal effective tax rate measures the extent

to which tax rates result in the addition of the pre-tax profit from an investment project. Marginal

effective tax rate measured to which extent income tax contributes to additional earning before

tax in an investing project. The calculation of marginal tax rate is by dividing the percentage of

increasing or decreasing one unit of tax rate by percentage of increasing or decreasing in earning

before tax.

In this study, statutory tax rate based on Nigerian Tax Policy was utilized. Out of several layers

of income tax rate, the highest tax rate imposed on income will be used in this study. There are

several reasons for selecting statutory tax rate than the others. First, statutory tax rate is the

easiest way to measure tax burden level compared to other methods. Second, statutory tax rate

plays an important role in country selection by multinational companies because companies are

more likely to choose a country with low tax rates. As such, this study hypothesized that tax rate

had no significant influence on FOi inflow to Nigeria.

4.1.4 Gross Domestic Product (GDP) Growth

One out of several key factors as FDI determinant is host country's market growth rate. It can be

measured by the GDP growth rate. Investors. especially foreign investors, can be more

captivated in countries with larger market size, as indicated by GDP growth rate which reflects

the level of potential demand. Definition of GDP grO\vth as World Bank (2012) clarified is the

annual percentage growth rate of GDP at market prices based on constant local currency where

the aggregates are based on constant 2000 U.S. dollars. The terminology of GDP itself is defined

as the sum of gross value added by all resident producers in the economy plus any product taxes

and minus any subsidies not included in the value of the products. [t is calculated without

54

making deductions for depreciation of fabricated assets or for depletion and degradation of

natural resources.

Various studies indicate that GDP growth is an important sign to indicate market attractiveness.

Moreover, various studies have shown that transaction costs would be lower in countries with

high levels of growth ( Caves, 1971; Zhao and Zhu, 2000). This study null hypothesis was that

GDP Growth has no significant relationship with FDI inflow to Nigeria.

4.2 Descriptive Analysis

Before presenting the analysis results, this chapter describes the nature of the variables used in

this study. Descriptive statistics of dependent and independent variables in the model are

summarized in table 4.1.

Table 4.2 Descriptive Statistics of FDI the Dependent Variable and Independent Variables

N Mean Std. Deviation

1 FDI 30 5.9690 10.34625

2 Tax Rate 30 0.6206 1.10198

,., Tax Incentives 30 1.3 I 03 0.55099 .)

4. GDP Growth 30 0.7431 1.2089

Table 4.2shows the result of the descriptive statistics. The analysis results indicate a mean of

0.6206 with a minimal standard deviation of 1.1019 for tax rate and, a mean of 1.3103 with

standard deviation of 0.55099 for tax incentive a mean of 0.7431 with a standard deviation of

1.2089 for GDP growth. The implication here is that tax rate, tax incentive and GDP grov.1h are

55

to a large extent determinants of FDI inflow in Nigeria. This means a rejection of the null

hypotheses and acceptance of the alternative hypotheses.

4.3 Table 4.3: FDI Net inflow to Nigeria 1984 - 2014 (%)

Year FDI Inflow(%) 1984 115,164,785 1985 485,581,321 1986 193,214,908 1987 610,552,091 1988 378,667,098 1989 4,692,249,739 1990 485,581,321 1991 I 93,214,908 1992 610,552,091 1993 378,667,098 1994 1,884,249,739 1995 1,079,271,551 1996 1,593,459,222 1997 1,539,445,718 1998 1,051,326,217 1999 1,004,916,719 2000 1,140,137,660 2001 I , 190,632,024 2002 I ,874,042, I 30 2003 2,005,390,033 2004 1,874,033,035 2005 4,982,533,943 2006 4,854,416,867 2007 6,034,971,231 2008 8. 196,606,673 2009 8,554,840,769 2010 6,048,560.266 2011 8,841,952,775 2012 7,101,031,884 2013 5.609,000,000 2014 4,808,400.000

Source: World Bank (2015); Central Bank of Nigeria (2014)

56

I I

Trend of FDI Inflow in Nigeria in the period 1984 to 2014

9500000000 9000000000 8500000000 8000000000 7500000000 7000000000 - 6500000000

-(A-6000000000

~ 5500000000 ...... :: 5000000000

.2 4500000000 I+- 4000000000 .s 1-'1 3500000000

~ 3000000000 2500000000 2000000000

,-,-r,-,-,-,,-,-,-r,-,-,-r,-,-,-,,-,-,-,-,,-,-,-,,-,-, .l_L_I__J __ LL_I__J _ _i_L_L_I_J._L_L_I __ LL_L_l__j _ _l_L_L.J_.l_L_L_J _ _l_L I I I I I I 1 I I I I I I I I I I I I I I I I I I I I I I I +-~-~~-4-L-~~-4-L-~~-4-L-~~-4-L-~~-~-4-L-~~- -L ~-4-L I I l I I I I I I I I I I I I I I I I I I I I I I I I I I I ,-,-,,-,-,-,,-,-,-r,-,-,-r,-,-,-r,-,-,-,-, - -, ,-,-, I I I I I I I I I I I l I I I I I I I I I I I I I I I I I I I 1-r-,-7-1-r-,-7-1-r-r7-·rr-r7-,-r-r7-7-1-r-1- -1 r ,- -1-r 4-L-~~-4-L-~~-+-L-~~-4-+-~~-4-L-~~-~-4-L- ~-4 -~ 4-+ I I I I I I I I I I ! I I I I I I I I I I I I I I I I I I I I +-r-r;-+-r-r;-+-r-r7-➔-+-r7-➔-+-r7-;-+-r- ;-+- -r; +-+ I I I I I I l I I I I I I I I I I I I I I I I I I I I I I 1-r-r,-1-r-r,-1-r-r7-,-y-r7-,-r-r7-7-1-r ,-1- -r,- -r .l_L_LJ _ _l_L_LJ_.l_L_LJ_J_L_LJ_J_L_LJ_J _ _i_L LJ _ _i_L_LJ _ _ L I I I I I I I 1 I I I I I I I I I I I I I 1 I I I I I I l I I +-+-~4-+-~-~4-+-~-~~-➔-+-~~-➔-+-~~-4- - -~4-+-~-~4-+ I I I I I ! I I I I I I I I I I I I I l I I I I I I I T-r-r7_T_ -r7-T-r-r7-,-r-r7-,-r-r7-7- -r-r7-T-r-r7_T_T

l _ L _I_ .J_.l_ _l__j __ LL_L_I_J._J__L_I_J._l_L_I _ _J '.J._L_L.J _ _l_L_L.J_ .LL I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I +-~-~4-+ -~4-+-~-~~-➔-+-~~-➔-+-~~-4 +-~-~4-+-~-~4-+-+ I I I I I I l I I I I I I I I I I I I I I I I I I I I I I I I ,-,-,,-,, ,,-,-,-r,-,-,-r,-,-,-r,-, ,-,-,,-,-,-,,-,-, .LL_I _ _J _ _l L I__J _ _l_L_L_L . .LL_L_I_J._L_L_I _ _J _l_L_l__j __ LL_I_.J __ LL I I I [ I I I I I I I I I I I I I I I I I I I I I I I I I I 4-L-~~-4 L ~~-4-L- ~-4-L-~~-4-L- -4-L-~~-+-L-~~-+-L I I I I I I l I I I I I I I I I I I I I I I I I I ,-,-,,-,-, ,,-,-, n- - -,,-,-r. ,,-,-,-,-,,-,-,-,,-,-, I I I I ! I I 1 I I I I I I I I I I I I I I I I I I 1-r-r,- -r -7-1-~ r ,-r- -r-r7-,-1-r-r,-1-r-r,-1-r ~- -~ -~ ~- -~~-4-L-h~-4-L-~~-~-+-~-~~-+-L-~~-+-+

l l I I I I I I I I I I I I I I I I I I I I I I -r- ;-+-r-r -+-r-r~-~-+-r7-➔-r-r7-;-+-r-r1-+-r-r1-+-+

◊rt-◊v◊~8?\~#'yr5f$~rSJ,◊&,,◊ar-◊&J◊~~\J/fZ$'~~~&,f;"&*'f)~'f)~&\r#~~~-o-'fJ◊'fJ~ Year

Source: World Bank (2015); Central Bank of Nigeria (2014)

In the above figure. numbers on the X-Axis represent years ranging from I 984 to 2014. This

figure and preceding table present the trend of FDI inflow to Nigeria (billion dollars) between

1984 and 2014.

The figure and table above show a very low FDI inflow to Nigeria between I 984 and 1993 as it

ranged between 115.2 billion USO and 378.7 billion USO respectively. A sharp increase in the

FDI inflow to the country happened in 1994 when it grew to 1,884.2 billion USO. Though it

stagnated at about 1,000.0 billion and L500.0 billion USO between and 200L a shocking trend

57

of sharp increase took place between 2002 and 2011. Within this period, FDI inflow to Nigeria

ranged between 1,874.0 billion USD and 8,841.9 billion USD. The figure above shows a

shocked trend of sharp plunge of FDI inflow in Nigeria during 2012 and 2014. According to the

figure, FDI inflow to Nigeria decreased from 8,841.9 billion USO in 2011 to 7,101.0 billion

USD in 2012, 5,609.0 billion USD in 2013 and 4,808.4 billion USD in 2014. The shock in this

trend might be a result of increase in total tax rate of Nigeria from 32.2% in 2010 to 33.8% in

2013 and 2014.

According to UNCTAD (2009) the Foreign Direct Investment inflows to Nigeria is mainly

concentrated in the oil sector and highly influenced by its price at the intemational market as

well as the Nigerian national reforms and policies in this sector. lt was noted that as of 1970, a

year before Nigeria became a member of the Organization for the Petroleum Exporting Countries

(OPEC), the foreign direct investment inflows was about $205million. This figure by 1984 had

risen to 115.2 billion USO. Also, the investments inflows also responded proportionally in the

same line with the attractive fiscal policies for private sector investors in oil and gas sectors that

followed in 1986 (UNCTAD, 2009, p8).

The United Nations Conference on Trade and Development (UNTAD) ranked Nigeria as

Africa's number one destination for Foreign Direct Investment in Africa, for the second time in

two years. The latest UNCTAD report, titled, "Global Value Chains: Investment and Trade for

Development", put Nigeria's FDI net inflows at 5,609.0 billion USO in 2013. The repo1t said

Foreign Direct Investment flows to African countries went up by five per cent in 2012, though

global FDI declined by l 8per cent. The report noted that most of the FDls into Africa mainly

58

driven by the extractive industry, but said there was an increase in investments in consumer­

oriented n1anufacturing and services. ·

Nigeria receives the largest amount of Foreign Direct Investment (FOi) in Africa. Foreign Direct

Investment inflows have been growing eno1n1ously over the course of the last decade making the

country the nineteenth greatest recipient of FDI in the world. Nigeria's most important sources of

FDI have traditionally been the home countries of the oil majors. The USA, present in Nigeria's

oil sector through Chevron Texaco and Exxon Mobil, had investment stock of USD3.4 billion in

Nigeria in 2008, the latest figures available. The UK, one of the host countries of Shell, is

another key FOi partner- UK FDI into Nigeria accounts for about 20% of Nigeria's total foreign

investment. As China seeks to expand its trade relationships with Africa, it too is becoming one

of Nigeria's most important sources of FOi; Nigeria is China's second largest trading partner in

Africa, next to South Africa. From USD3 billion in 2003, China's direct investment in Nigeria is

repo1ied to be now worth around USD6 billion. The oil and gas sector receives 75% of China's

FDI in Nigeria. Other significant sources of FOi include Italy, Brazil, the Netherlands. France

and South Africa (UNCTAD. 2014).

Nigeria, by the year 2020 is poised to be among the Top 20 economies in the world with a

minimum GDP of$ 900 billion and a per capital income of at least $ 4000 per annum. As pa1t of

this Vision 20:2020, the Nigerian Government has put in place a number of investment

incentives for the stimulation of private sector investment from within and outside the country.

While some of these incentives cover all sectors, others are limited to some specific sectors. The

nature and application of these incentives have been considerably simplified. A brief summary of

the types of incentives offered include~ tax holiday/ tax exemption; investment allowance/tax

59

I i

I I I I I l

credit; duty/VAT exemption/ reduction; R&D allowance; deduction for qualified expenses.

Table 2.4 elaborate the main categories of tax incentives

60

NIGERIA'S GDP GROWTH 1984-2014 (%)

Table 4.5: Nigeria's GDP Growth 1984-2014 (%)

Year GDP, bin.% GDP per capita, dollars Current Prices

1984 180.2 2204 1985 178.8 2131 1986 90.4 1050 1987 55.8 631 1988 67 738 1989 60.5 650 1990 68.3 715 1991 64 652 1992 58.l 577 1993 56.7 549 1994 47 445 1995 49 452 1996 52 468 1997 54.4 477 1998 56.5 484 1999 57.7 481 2000 74.6 607 2001 71 563 2002 95.1 736 2003 108.8 821 2004 141.3 1039 2005 180.5 1293 2006 233.9 1632 2007 267.7 1819 2008 334.6 2213 2009 272.5 1754 2010 369.1 2311 2011 411.7 2508 2012 461 2730 2013 515 2966 2014 522.6 1097.97

Source: ·world Bank (2015); Central Bank of Nigeria (2014)

61

GDP Growth Rate

-1.2 11.3 1.9

-0.79 7.7 7.1 11.4

0 2.7 1.6

0.79 2.1 4

2.9 2.9 0.35 5.4 4.4 21.4 10.2 10.5 6.5 6

6.5 6.3 6.9 7.9 4.8 4.3 5.3 6.8

l i I'

I

11'

i ! I

u, I-

.m 8 ~ c

::ci 0: s

540

480

420

360

300

240

180

120

60

Trend of GDP of Nigeria in the period 1984 to 2014

-?i49...,_6{P~<{}."'°',fi,-?i,s,-?i~..&'\~'\,~'9y~ar-~°'\cJf._,~~~.t?i6PiY~~~~,s,iY*'\,#''\,#'\,&~r!PiY&~~~viY◊iY~ Year

Source: World Bank (2015); Central Bank of Nigeria (2014)

In the above figure, numbers on the X-Axis represent years ranging from 1984 to 2014. This

figure and preceding table present the trend of Nigeria's GDP growth (billion dollars) between

1984 and 2014. The table and figure above present the GDP growth of Nigeria betvveen 1984 and

2014. During the years (1984-20114), the GDP of Nigeria rose by 342.4 billion US dollars from

180.2 to 522.6 billion US dollars. A sharp decline in the GDP growth occurred between 1986

and 2002 when it fellow from 178.8 billion USO to 90.4 billion USO and stagnated at a growth

rate, which ranged between -0.79% and 2.9%. Great change began to happen in 2000 when the

country's GDP growth rate moved to 5.4% growing the GDP from 95.1 billion USO to 108.8

billion USO in 2003. Significant growth in Nigeria's GOP happened between 2004 and 2014

62

from 141.3 billion USD to 522.6 billion USD. The average annual growth of GDP of Nigeria

was 11 .4 billion US dollars or 44.8%. Share in the World however, dropped by 0.07%. Share in

Africa decreased by 1.5%. Share in Western Africa rose by 4.4%. In nut shell, the minimal GDP

of Nigeria was in 1984 (180.2 billion US dollars) and maximal GDP of Nigeria was in 2014

(522.6 billion US dollars). The annual growth rate of GDP in Nigeria was 6.8% in 2014.

63

I I

Tax Rate in Nigeria 1984 - 2014 (%)

Table 4.6: Tax Rate in Nigeria 1984 - 2014· (%)

Year Tax rate(%) 1984 35 1985 35 1986 35 1987 35 1988 35 1989 35 1990 30 1991 30 1992 30 1993 30 1994 30 1995 30 1996 30 1997 30 1998 30 1999 31.4 2000 31.4 2001 31.4 2002 31.4 2003 31.4 2004 31.4 2005 31.4 2006 32.2 2007 32.2 2008 32.2 2009 "7? .J ___

2010 32.2 2011 32.6 2012 33.8 2013 33.8 2014 33.8

Source: World Bank (2015); Central Bank of Nigeria (2014)

64

35.6

35.2

34.8

34.4

34.0

"o" 33.6 ci' 33.2 -(IJ 32.8 ,I.I IC

32.4 a.. >< ~ 32.0

31.6

31.2

30.8

Trend of Tax Rate in Nigeria in the period 1984 to 2014 - -T_T_T_r-r-r-r,-1-1-1-T_T_T_r-r-r-r,-,-1-1-T-T-,-r-r-r,-1-1-1 I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I +-+-+-~-~-~-r~-4-4-➔-+-+-+-~-~-~-~~-4-➔-➔-+-+-~-~-~-r~-4-4-

1 I I I I I I I I I I I I I I I I I I I I I I I I _ -L- - _ -LJ_J_J_J_i_L_L_L_L_L_LJ_J_J_J_i_L_L_L-L-LJ_J_J_

I I I I I I I I I I I I I I I I I I I I I I I I I I I 1 I I

+-+-+-l--t- -l--l--l--l-4-+-+-+-l--t-l--l--l--l-4-4-+-+-f--t-t-l--l--l--l-• I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I +-+-+-r-~- -r,-~-~-➔-+-+-+-r-~-r-r,-~-➔-➔-+-+-r-~-r-r,-~-~-1 I I I I I I I I I I I I I I I I I I I I I I I I I I I 4-4-L-~-~- -LJ-~-~-~-4-L-L-~-~-L-LJ-~-~-~-4-L-~-~-~-L -~-~­! I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I

+-+-t-t--r-, -:--:--1--1- ➔ -+-+-+-J--r-:--:--:--1-➔- ➔-+-t-J--r-r-: 7--1--1-, I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I T-T-T-,-r-r-r7-7-,-,-T_T_T_r-r-r-r7-7-,-,-T-T-,-r-r- 7-7-7-1 I I I I I I I I I I I I I I I I I l I I I I I I I I I I I +-+-+-~-~-~ ~~-4-4-➔-+-+-+-~-~-r-~~-4-➔-➔-+-+-~-~- r~-4-4-1 I I Ill I I l I I I I I I I I I I I I I -----1 I I I i_i_L_L_L_L LJ_J_J_J_i_L_L_L_L_L_LJ_J_J_J_ -L-L-L-L-LJ_J_J_ I I l I I I I I I I I I I I I 1 I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I T_T_T_r-r-r r,-,-,-,-T_T_T_r_ --- -- - - T-T-r-r-r-r,-,-,-1 I I I I I I I I I I I I I I I I I I I I I I I 7-7-T-,-r-r r,-,-,-1-T_T_T-, r-r-r,-1-1-1-T-T-,-r-r-r,-1-1-1 I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I +-+-+-~-~-~ r~-~-~-➔-+-+-+-~ ~-r-r~-4-➔-➔-+-+-~-~-~-r4-~-4-1 I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I

+-+-t-t--r-r -:--1--1-➔-+-+-t-1-r-~-~~--1-➔-➔-+-t-J--r-r-l-~--1--1-, I I I I I -&--Gl-----G-D-e-+-.... -0-_. I I I I I I I I I 1 I I I I I I T-T-r-r-r-r -r-r-r7-7-,-,-T-r-r-r-r-r7-7-7-

~~~~~~NN~~~~~~~~~~~~~~~~~~~~~~ ~~~~~~~-~-~~~-~-~~~-~~~~~~~~~~~~~~~

Year

Source: Source: UNCTAD 2014, World Tax Database (2014); World Bank (2015); Central Bank of Nigeria (2014)

In the above figure, numbers on the X-Axis represent years ranging from 1984 to 2014. This

figure and corresponding table present the trend of total tax rate(% of profit) in Nigeria between

1984 and 2014. Total tax rate is the total amount of taxes payable by businesses (except for labor

taxes) after accounting for deductions and exemptions as a percentage of profit.

Total tax rate (% of profit) in Nigeria was one of the highest in the world measured at 35.0

between 1984 and 1989. Following the country's tax policy amendments in 1989, the tax rate

stood at 30.0 between 1990 till 1998 when it was then measured at 31.4 between 1999 and 2005.

The tax rate in Nigeria later measured at 32.2 between 2006 and 2010. In 2011, total tax rate was

at 32.6. However. with the recent data on development indicators. the total tax rate in Nigeria

65

...................... ,. .. !

I I

was measured last measured in 2014 and stood at constant rate of 33.8 between 2012 and 2014.

Up to last-measured at 33.80 according to the World Bank.

Table 4.7. Tax Incentives of Nigeria from 1984 to 2014 (%)

Year Tax Incentives(%) 1984 6.7 1985 6.7 1986 6.7 1987 6.7 1988 7.5 1989 7.5 1990 7.5 1991 7.5 1992 7.5 1993 7.5 1994 7.5 1995 7.5 1996 11.0 1997 11.0 1998 11.0

1999 30.8 2000 30.8 2001 30.8 2002 30.8 2003 30.8 2004 30.8 2005 30.8 2006 31.6 2007 3 l.6 2008 31.6 2009 3 l.6 2010 31.6 2011 32.1 2012 32.5 2013 31.7 2014 32.7

Source: World Bank (2015); Central Bank of Nigeria (2014)

66

Figure 4.4 Trend of Tax Incentives in Nigeria in the period 1984 to 2014.

33

30

27 'o' ~ 24 II)

(lJ 21 .~ ,1.,1

C:

~ 18 .s >< 15 ~

12

9

6

Trend of Tax Incentives in Nigeria in the period 1984 to 2014

6 ~57.5~5~57.5~5~57. 6.76.76.7 .7

11.111.0.1 0

0 '4° '\.#' 0-s, '94], 0<8\Js'?0C)\~~&;, -?>°'"'ip0dp '\.~'\06p 41' ,s,<S-'\.,&\&~0 '\.,# rf;,(s> '\.,~~,s. '\.,&~&i ~\~->rf;, <J,'i,"?'f' ~

Year

Source: World Bank (2015); Central Bank of Nigeria (2014)

In the figure above, numbers on the X-axis represent years under study from 19984 to 2014. This figure

and the corresponding table present the trend of tax incentives in Nigeria in the period 1984 to

2014.

According to the trend sho\\ed by the figure above. the tax incentives in Nigeria \Vere increasing

steadily from 1984 to 1998. In the next year the tax incentives sharply increased from 11 % to

30.8%. This sudden increase is because of the countt-y" s policy amendments in 1999 towards

attraction of foreign direct investment. From 2000 up to 2014 tax incentives of Nigeria were

experienced on the consistency steady increase.

67

Table 4.7: Summary of FOi Inflow, Tax Rate, Tax Incentives and GDP (1984 - 2014)

Variable Observation Mean Median Std. Dev. Min. Max

FDI INFLOW 30 2.21E+09 8.87e+08 3.79E+09 -4.55E+09 l.34E+I0

GDP GROWTH 30 5.350373 5.989109 4.067567 -13.12672 9.084714

Tax Rate 30 33.03333 30 4.759624 28 45

Tax Incentives 30 0.2333333 0 0.4301831 0 1

This study covered 30 observations from 1984 to 2014. One dependent variable (FDI inflow)

and independent variable tax incentives tax rates and GDP Growth are summarized in the above

table.

Out of four variables, only FDI inflow has a standard deviation higher than its average. This

condition shows the data are not equally spread. However, it is still permissible to incorporate

the data into model OLS regression analysis. Moreover, the summary of the data shows that all

variables have positive average even though some of them have negative value as shown in the

minimal value of FDI inflow and GDP Growth.

4.5 Relationship between Tax Incentives, Tax Rate, GDP Growth and FD[ inflow in

Nigeria

Table 4.8: Pearson Correlations of the Independent variables with the Dependent variable

FOi Sig N Decision Tax Pearson Correlation .490 .024 I 30 Significant Positive Incentives Coefficient (r) Relationship -Tax Rate Pearson Correlation .450 .041 30 Significant Positive

Coefficient (r) Relationship GDP Penrson Correlation .450 .041 30 Significant Positive

I Growth Coefficient (r) I Relationship

Table 4.8 indicates that there is a positive relationship betv,1een tax rate, tax incentives, GDP

growth and. FDI inflow in Nigeria. These results for tax rate and tax incentives show that the

68

relationship is statiscally significant considering the Pearson Correlation Coefficients r = .490, r

= .450 and r = .450at 0.05 level of significance:- Therefore, these analysis results reject the null

hypotheses and accept the alternative hypotheses thus, concluding that there is significant impact

of taxincentive. tax rate and GDP growth on FDI inflow to Nigeria. This result also supports the

findings inEdmiston, Mudd and Valev(2003 ), vvhich concluded that tax incentives stimulate the

inflow of FOL Thisresult also suppo11s the findings in Buettner and Ruf (2005), which explained

that the statutory tax rate shows asignificant positive impact on FDI.

4.6 Basic Assumption Test

4.6.1 Multicollinearity

The first basic assumption test undertaken here is multicollinearity test. tvlulticollinearity means

that independent variables should not correlate one another. If correlation exists between

independent variable, then we are in the state of multicollinearity problem. In this case, the

regression model vvill end up with an incorrect or erroneous result and therefore. invalid

conclusion will be prevailed.

The simplest multicollinearity test is conducted by testing the correlation coefficient between the

independent variables. As a rule (rule of thumb). if the correlation coefficient is above 0.85. ,ve

should suspect of multicollinearity problems among independent variables. Another moderate

method. which is commonly used. is by using variance-inflating factor or VIF test. VIF value

above 10 will be considered as multicollinearity problem and the problem will be solved by

dropping the independent variable from the model.Correlation value betvveen independent

variables can be shown as belov,r:

69

Table 4.9: Correlation Value among Independent Variable

FDI Inflow GDP Tax Rate Tax

Growth Incentives

FDJ Inflow 1

GDP Growth 0.0345 1

Tax Rate 0.1889 0.7622 1

Tax Incentives 0.3891 0.1772 0.4003 1

Table 4.9 shows that the maximal absolute correlation value among independent variables is

0.7622 which exists between Tax rate and GDP Growth variable. Since the maximal absolute

correlation value is below the rule of thumb (in this study. it is assumed to be 0.85), vve may

conclude that we do not have multi-collinearity. Another method that has been applied is VIF

approach. The value ofVIF approach as STATA version 12.0 calculated is as follow:

Table 4.10: VIF Value among Independent Variable

Variable VIF 1/VIF

GDPGROWTH 4.01 0.249651

Tax Rate 3.99 0.250669

Tax Incentives 1.95 0.512337

Mean V!F 3.46 '

Since all the values of VIF are below the l 0. it can be concluded that there 1s no multi­

collinearity problem in the model.

70

4.6.2 Omitted Variable Test

This study carried out two tests in examining the omitted variable. The first one is Omitted

Variable Test (OVTEST), and the other is Linktest. Both of them are available in STAT A 12.0.

The idea behind OVTEST was that this test could analyze the model by checking if the model

has omitted any important variable or included any unnecessary variable. The null hypothesis in

OVTEST is that the model has no omitted variable. Therefore, we should not reject the null

hypothesis if the model is built con-ectly.

OVTEST Calculation

. ovtest

Ramsey RESET Test using powers of the fitted values of FOi iNFLOW

Ho: Model has no omitted variable

F (3. 20) = 0.11

Prob.> F = 0.9535

According to the above calculation. we find that Prob> F = 0.9535 which is highly insignificant

even for 10% level of significance. Therefore, we cannot reject the null hypothesis and

concluded that the model has been correctly specified. This model already included important

variables and omitted unnecessary variable.

Another omitted variable test performed in this study is Linktest. The way we take conclusion in

this test is by carefully observing the _hatsq value. If the _hatsq value is not significant, we may

conclude that the model has been correctly specified.

71

.......... ------ .. !

Table 4.11: Linktest Calculation

. linktest

I SS df MS Number of obs = 30

Source F (2, 27) = 59 .52

Model 3.3987e+20 2 1.6993e+20 Prob> F = 0.0000

Residual 7.7091e+19 27 2.8552e+J8 R-Squared = 0.815 I

Adj. R-Squared = 0.80 I 4

Root MSE = I .7e+09

Total 4. l696e+20 29 l.4378e+19

FOi INFLOW Coefi. Std. Error t p> It I (95% Coef. Interval)

hat .9677175 .173079 5.59 0.000 .6125872 l .322848 -

Jrntsq 4.67e- I 2 2. l3e-l I 0.22 0.828 -J.89e-11 4.83e+ 11

cons -4416808 3.70e+08 -0.01 0.991 -7.36e+08 7.54e+08 -

In the linktest above, the variable _hatsq is not significant. The _hatsqProb> [t] value is 82.8%

\Vhich is higher than 10% significant level. Therefore. this confirms that there is have no

specification error in the model. No model modification is needed here.

4.6.3 Normality Test

Normality test is performed to determine whether the data in the study is normally distributed or

not. This study o.pplied Shapiro Wilk test to detect normality problem in the model. Null

hypothesis in Shapiro-Wilk test is that the data have been normally distributed. I hve select 5%

le\·el of significance. then vie may reject the null hypothesis if prob> z ft)r Shapiro-Wilk test is

below 5%: otherwise we have no option but to accept null hypothesis and conclude that the

residual data are normally distributed.

72

Table 4.12: Shapiro ·wilk Test on Normality Problem

. swilk r Shapiro-Wilk W test for normal data

Variable

Obs lw Iv iz I Prob>z r 30 I o.93358 ) 2.11 l I 1.545 I 0.06116

Shapiro-Wilk test calculated in STATA version 12.0 yield value prob> z is 6.116% which is

higher than 5% level of significant. Therefore. we can safely conclude that the residual of this

model is normally distributed. The graphical method performed by ST AT A version 12.0 also

shows the normality of model residual.

4.6.4 Autocorrelation Test

Autocorrelation test is conducted by applying Durbin-Watson Test (d statistics). According to

Gujarati (2005), the area in which we do not reject null hypothesis and decide that we do not

have autocorrelation problem in the model is if the Durbin Watson value is located between 2

and 4-du. As the figure 4. 9 shows. Durbin Watson statistics value is 2.164005 which is clearly

located bet\veen 2 and 4-clu. Therefore. \Ve may consider that the model is clear from

autocorrelation problem.

Durbin \Vatson Statistics

. dwstat

Durbin-Watson ct-statistics ( 7. 30) 2.164005

73

4.6.5 Heteroscedasticity Test

Heteroscedasticity test aims at testing whether the regression model has constant residual

variance for each observation. If the residual variance of each observation is different, we

conclude that there is a heteroscedasticity. This study carried out Breusch-Pagan test for

heteroscedasticity. The null hypothesis of this test is homoscedasticity or constant variance. With

the level of significant 5%, the Breusch-Pagan Prob> Chi2 should be more than 5% for us to

conclude that ,ve have no heteroscedasticity problem.

Breusch-Pagan heteroscedasticity Test

. estathettest

B1·eusch-Pagan / Cook-Weisberg test for heteroskedatasticity

Ho: Constant Variance

Vat"iables: Fitted Values of FDI INFLOW

Chi2 (l)

Prob> chi2

9.25

0.0024

According to STA TA 12.0 result as shown in figure 4.10. Breusch-Pagan Prob> Chi2 is 0.24%.

Therefore. \Ve cannot reject null hypothesis and acknovv-Jeclge that ,ve have heteroscedasticity

problem in the model. To resolve heteroscedasticity problem. this study conducted OLS

regression under robust standard errors.

4.7 Relationship between Tax Policy and FOi Inflow

After fulfilling all of Ordinary Least Square basic assumptions. a regression analysis was carried

out. The model is clear from multicollinearity problem, normality problem. autocorrelation

problem and the model is correctly specified. However. there is a heteroscedasticity problem

74

here. To solve this problem, OLS regression was conducted under robust standard errors.

STAT A 12.0 gave the result of OLS regression using robust standard en-ors as follovvs:

Table4.13: Regression Estimation Using Robust Standard Error

. regress FDIINFLOW GDPGROWTH TaxRateTaxlncentives, vce (robust)

Linear Regression

Number of obs = 30

F (6, 23) = 19.02

Prob> F = 0.0000

R-Squared = 0.8148

Root ivlSE = l .8e+09

FDIINFLOW Coer. Robust Std. t p> It I 95% Coef Interval)

Error

GDPGROWTH I .64e+08 I .64e+08 0.98 0.337 -l.82e+08 5. I le+08

TaxRate -2.07e+08 6.95e+08 -2.97 0.007 -2.50e+09 8.45e+08

Tax Incentives -6.98e+08 7.46e+08 0.94 0.359 -2.24e+09 8.45e+08

cons -1.1 Oe+ I 0 5.38e+09 -2.04 0.053 -2.2 le+ 10 l.66e+08 -

Table 4.13 exposes regression estimation of Tax Policy provisions for Tax Incentives, Tax Rates

and GDP Growth on FDI inflov•i in Nigeria. The model is good enough because the R value is

81.48%.

Since there is no multicollinearity problem, high value of R indicated that the independent tax

policy with its construct variables (Tax Incentives. Tax Rate and GDP Growth) succeed to

explain the FD! inflmv trends in Nigeria.

From table 4.13 above. we can develop the researchmodel that is a multiple regression model.

FDI =Po+ P1GDP Growth+ B2Tax rate+ PJ Tax incentive+ e1

75

Where

FDI is the Foreign Direct Investment (independent variable)

While the dependent variables include

GDP growth is the Gross Domestic Product growth

Tax Rate

Tax incentives

e1 is the error term

~o, Bi, B2. ~3- Are the parameters in the model.

FDF""' 1.10 + 1.64 GDP growth-2.07 Tax Rate-6.98 Tax incentive.

The result from the regression analysis model indicate that Gross Domestic Product Growth is

positively rel::tted to FDI by the positive signs as GDP Grmvth increases by one unit on the

average FDI \;,.,rill increase by l .64 units.

According to the model tax rate and tax incentive are reversely related to FDI as the negative

sign reveals. This means thnt when tax rates increased by one unit FDI \\'ill decrease on the

average by 2.07 units and \\'hen tax incentive increased by one unit FD! will on the average

decrease by 6.98 units Yvhen all mentioned variables are zero FD! will be approximately 1.10

units, this means the rate ofFDl independent of tax policy was 1.10 units.

76

4.8 Statistical Test for OLS Model

This section discusses several statistical tests co9ering t-test from previous OLS regression. T­

test is conducted by comparing the value of 1 statistics of each independent variable vvith the

value of t table. By using ST A TA 12.0, we can easily know the result oft -test by comparing

Probability of/ value with level of significance. In this study, the researcher used 5 percent or

95% confidence level. If the probability oft value< 5 percent, then it can be concluded that the

independent variable is significant toward dependent variable. To be more precise explanation of

t -test for each independent variable is presented below.

4.8.1 GDP Growth

Probability value of r statistics is 0.33 7 which is higher than level of significant 5%. Therefore, it

can be concluded that GDP Growth has no significant relationship with FDI inflow. The result is

quite surprising since we expect significant relationship with positive value of GDP Growth.

4.8.2 Tax Rate

Tax rate shows a negative signal and indicates a significant relationship with FDI Inflow. The

probability value of t statistics for tax rate is 0.007. which is lovver than 5 percent level of

significance. The negative sign here is quite acceptnble since lower tax rate means higher profit

after tax for investors.

4.8.3 Tax Incentives

Tax incentives. which has probability value oft statistics 0.359. This vrdue is much higher that 5

percent level of signi f'icance. Therefore. it can be cone lucled that tax incentives has insignificant

relationship with FDI innow. This finding is in line with many researchers conclusion. For

77

example, Root &Ahmed (1978), and Cleeve (2008) in their empirical research regarding

determinant o1 FDI inflovv proved that tax incentives is not significant as FDI determinant.

78

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

5.0 Introductions

This chapter covers three parts 1 ). Summary of findings 2) conclusion and 3) recommendation,

the chapter presents the discussions of the results derived from the data presented in chapter

four, it explained the major study findings of the impact of tax policy on foreign direct

investment in Nigeria 111 the period 1984 to 2014. It states the conclusion and based on the

conclusion some policy: recommendations are presented from the findings of the study. In

relations to the research objectives.

5.1 Summary of Findings

Findings of the study were presented based on the objectives of the study) .To examme the

relationship between tax incentive and foreign direct investment in Nigeria.2. Toexamine the

relationship bet\veen tax rates and foreign direct investment in Nigeria. 3. To examme the

relationship betv•ieen GDP Growth and foreign direct investment in Nigeria.

The first objective of the study \\·as to examine the relationship between tax incentives ancl

foreign direct investment in Nigeria in the period 1984 to 2014. Based on the finding tax

incentives has probability value oft-statistics 0.359 \Vhich is much higher than that 5 percent the

level of significance. It can therefore be concluded that tax incentives has insignificant ~ ~

relationship \Vith FDI inflmv. This finding is in line with many reseurchers conclusions for

example Root & Ahmed (1978) and Cleeve(2008)in their empirical research regarding

79

determinant of FDI in flow proved that tax incentives policy is not significant as FDI

determinant.

Considering the second objective which is to examine the relationship between tax rate and

foreign direct investment inflow in Nigeria in the period 1984 to 2014 the following

findings emerged from the analysis's below.

Tax rate shows a negative signal and indicates a significant relationship with FDI inflow .the

probability value oft-statistics for tax rate is 0.007 which is lower than 5 percent level of

significance. The negative sign here is quite acceptable since lower tax rate means higher profit

after tax for investors.

The third objective of the study was to exan1me the relationship between GDP growth and

foreign direct investment in Nigeria. Based on ordinary least square regression analysis, this

study shows that GDP growth has insignificant relationship with FDI inflow in igeria.

The findings of the research study reveals that two out of the three independent variables tax

incentive and GDP growth has insignificant relationship with FDl inflow. Also the findings

reveal that tax rate has negative significant relationship to FDf.

5.2 Conclusions

Based on the facts and findings presented in chapter four. the following salient conclusions have

been made.

80

Based on Ordinary Least Square regression analysis, this study found that tax rates have

significant impact on FDI inflow in Nigeria either in negative or positive. Tax rate therefore is an

independent variable with negative significant relationship.

Tax is convincingly proven not significant as FOi inflow determinant. The possible reason is

because tax incentives offered in Nigeria will never be able to offset susceptibility in economic,

politic, government policy and lack of infrastructure as previously prevailed in Nigeria.

Moreover, tax incentives as a provision of tax policy specially are not the main consideration for

investors in investment decision making. However, if other main FDI determinants are available,

tax incentives will be additional point for investors in locating their investment. Hence, we

conclude by rejecting the null hypothesis tax incentive has no positive effect on FDI inflow in

Nigeria.

The tax policy in awarding tax incentives as it was executed under previous government policies

brought uncertainty for investors. They will therefore spend extra eff01t only for knowing

whether they are eligible or not for being granted this incentive. As a result, both investors and

policy makers easily fall into corruptions, cronyism, and nepotism.

Tax reforms in 2004 had proven that lowering tax rate, offering tax incentives and simplification

of tax mechanism can attract FDI growth more than giving tax holiday facility. Investors

appreciate more on lower tax rate and simple tax procedure as well as extending tax incentive

facilities. However, reducing the tax rate and simplifying tax procedures need extra effort and

precise calculation than giving tax incentive facilities. The study also reveals that GDP grow1h

has insignificant relationship with FDI inflow in Nigeria.

81

I I

5.3 Recommendations

Referring to ""the previously described conclusions, this study offers the following essential

recommendations in order to sustain and maintain foreign direct investment inflow in Nigeria as

well as sound tax policy.

Empirical quantitative analysis concluded that tax rate has a significant and negative impact on

FDI inflow. Accordingly, lowering tax rate accompanied by tax procedure simplification will

increase FDI inflow. Hov,1ever, lowering tax rate can also mean giving incentives of tax rate

discount to all taxpayer which in fact will decrease tax revenue. Therefore, it is better for the

government to opt for tax rate discount incentive and select the appropriate criteria for granting

this incentive.

A tax incentive policy should be planned and managed appropriately. The requirement in giving

it should be clearly stipulated in law in such a way that investors can easily interpret without

incurring dispute. Moreover. government should not repeat the previous mistakes by granting tax

incentives based on discretionary basis to seal up any opportunity that could bring toward

corruption, cronyism. and nepotism.

There should put in place national policy that can increase the country higher level of GDP

growth as an impo1tant sign to indicate market attractiveness and transaction cost will be lower.

Lastly, there is need for conducting cost analysis before implementing tax incentive policy.

Government should assure that the benefit from FDI inflov./ as a result of implementing tax

incentive facilities is higher the cost associated ,vith it. This cost benefit analysis needs

82

meticulous calculation and analysis. However, the result will lead to effective and efficient tax

holiday regulation.

5.4 Areas for further Research

The researcher suggests the following areas for further research:

1. The effect of political stability on motivation toward investment

2. Income distribution and foreign direct investment

3. Multi-national cooperation and foreign direct investment

83

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Nigeria, Newcastle Business School, Northumbria University, Newcastle upon Tyne,

England

Ayan wale K. (2007), international transfer pricing. Mass Edward Elgar

Agosin, M. (2009).Korea and Taiwan in the financial crisis.Working Paper, 5. Santiago, Center

on International Economics and Development, University of Chile.

Akingube, 0. (2003) Flow of Foreign Direct Investment To Hitherto Neglected Developing

Countries. ·wIDER Discussion Paper. January.

Anupam, Evangelos A. and Dhaneshwar G (2000).Promoting Growth in Sub-Saharan Africa.

Washington: International Monetary Fund, Publication Services.

Ariyo, A ( ) Utility Privatisation and the Poor: Nigeria in Focus.

Ayo k i ,M. ( 200 7 ),Tax Pe rformanceinPoorC ountries: Country Re po rtN igerial PRA

WorkingpaperNo.21

Barnett. Tony and Piers B. (1994 ).AIDS in Africa: Irs Present and Future Impact. England:

John Wiley and Sons Ltd.

Bekibinga A. (2006), the eHect of investors on firm performance

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Bhagwati, J. and Srinivas,m. T. N. (2002) Trade and Poverty. American Economic Review

Papers and Proceedings May.

Bird and, Richard M. and Enid S. (2004 ).International Handbook of Land and Property

Taxation. Cheltenham, U.K. and Northampton, Mass.: Edward Elgar.

Bird, M. (2002). Tax Policy and Economic Development. Baltimore and London:

Borensztein, E. (1990) Debt Overhang, Credit Rationing and Investment. Journal of

Development Economics. 32, p.315-335.

Boyatzis,R.E.(2008),Competenciesinthe21 stcentury,Journaloflvfanagement

Development.Vo 1.2 7No .1.2008. pp.5-12.EmeraldGroupPub lishingLimitecl0262- l 711.

Cantwell, J. (1997) Globalization and Development in Africa.In Dunning, J. and I-Iamdani,

K.The New Globalism and Developing Countries.UNO Press.

Chan, K.1-L Chow. L.. (2007). International transfer pricing for business operations in

Chen, \V .. (2011 ). The effect of investor origin on firm performance: Domestic and

China: inducements. regulation. and practice. Journal of Business Finance and

Accounting 24 (9 & 10). 1269-1289.

Collier P. (2010). The Political Economy of Natural Resources, social research Vol77 :

Collier, P. and Patillo. C. (1999), Reducing the Risk ofinvestment in Africa. Mcmillan.

Cucc ia,A. (2 004 ). Theeconom icso ftaxco mp! iance :whatclO\vekno\~/and\Vhere

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Estimatingtheimpactsoftaxpolicy ,enforcement,andIRSresponsiveness(Publication 1916,R

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Fjeldstad, 0. and Moore.M. (2009.) "Revenue authorities and public authority in sub-

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Gastanaga, V.M., Jeffery, B.N. and Bistra, P. (1998) Host Country Reforms and Foreign

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88

APPENDICES

APPENDIX 1 A: TRN'iSMITTAL LETTER

OFFICE OF THE DEPUTY VICE CHANCELLOR (DVC)

COLLEGE OF HIGHER DEGREES AND RESEARCH (CHOR)

KAMPALA INTERNATIONAL UNIVERSITY

Ggaba Road-Kansanga. P.O. Box 20000, Kampala, Uganda. Tel: +256-414-266813, +256-41-267634 Fax: +256-414-501974.Cel:+256-706-251084 E-mail: admin@kiu.ac.ug, Website: www.kiu.ac.ug

"'OFFTCE-6rTFn:~1n:;oJj tiif D"EPARTM!::tfr;·1:coR«:>Mics;-i:n)sfNESS Ai\!D f•lAMAGEMENT SCIENCES

COLLEGE OF HIGHER DEGREES AND RESEARCH

Apri!, 08, 2014.

'.H'HRODUCTION LETTER FOR DANlADI KAMAL MOHAMMED REG.NO.

MEC/41616/133/DF TO CONDUCT RESEARCH IN YOUR ORRGANISATION

The above mentioned candidate is a bonafide student of Kampala international

Ur 1versity pursuing a Masters' of Arts in Economics.

H i is currently conducting a field research for his dissertation entitled "Taxi Policy ancl

fcreign Direct Investment in ,(mm State Nigeria."

Your organization has been identified as valuable source of information pertaining to

his research project. The purpose of tl,is letter then is to request you to avail him with

peitinent information lle may need.

Any information sl1ared with hirn •· :1 be used for academic purposes only and shall be

kept with utmost confidentiality.

Any assistance rendered to hfm w1H be ilighly appreciated.

Yours truly,

Dr. Edris s. !<asenene

Deputy Prindpai, CHOR.

"Expiodng J-!eights"

89

AP}!ENDIX 1B: TRANSMITTAL LETTER FOR THE ORGANIZATIONS

Dear Sir/ Madam,

Greetings!

I am a Master of Arts in Economics student at Kampala International University. Pa1i of the

requirements for the award is a research report. My study is entitled, Tax Policy and Foreign

Direct Investment in Kano State, Nigeria.

Within this context, may I request you to participate by assisting me \Vith some relevant

statistical data to the above research topic for academic purposes only and no information of

such kind shall be disclosed to others.

Thank you very much in advance.

Yours faithfully,

Mr. Danladi Kamal rvlohammed

90

APPENDIX II: CLEARANCE FROM ETHICS COMMITTEE

. .:. ' ~

91

'.:::<:·, • -- 2009

i'eo•,,:·.:s':,i 'sce1,::t

RDGB!f:::-"',

Rcc-:.:,r•'

',, 'f'?:':

.. 1-/·I 2,D,

L

Debit Credit

us:; 7;::.s oo

US$ 335 00 USS •i ,085.00 US$ ·I ,NJ5 00

USS 335,00

.J~r o./_i ::-:: Js.:. -,- i} ~~J

l;:o'.i L; 00

US':'> 1,835.00 USS 1,335.00

APPENDIX III: INFORMED CONSENT

I am giving my consent to be part of the research study of Mr. Danladi Kamal Mohammed that

will focus on Tax Policy and Foreign Direct Investment in Kano State, Nigeria.

I shall be assured of privacy, anonymity and confidentiality and that I will be given the option to

refuse pai1icipation and right to withdraw my participation anytime.

I have been informed that the research is voluntary and that the results will be given to me if I

ask for it.

Initials: --------------

Date ---------------

92

APPENDIX VI: TIME FRAME FOR RESEARCH PROJECT

ACTIVITY

Months

Proposal writing

Proposal Editing

Data collection

Data Anangement

Data analysis and

presentation

Editing

submission

Defense

and final

DURATION

Jan.2015 Feb,2015 Mar,2015 APril,2015

93

APPENDIX VII: RESEARCH BUDGET

Particular Quantity AmountN

Stationary Paper 7 Reams

Ink 1 Cartridge 6000

Binding materials 7

Research Assistants 3@ 100,000 12,000

Transport costs l 0,000

Data Analysis 6,000

Up keep 5,000

Miscellaneous 6,000

Total 45,000N

94

APPENDIX VIII: RESEARCHER'S CURRICULUM VITAE

PERSONAL PROFILE

Danladi Kamal Mohammed

Male

Nigerian

Name

Gender

Nationality

Contact 0755381270 (Uganda) +2568037465689 (Nigeria)

EDUCATIONAL BACKGROUND

Institution

Kampala International University

(Uganda)

Award

Masters ofa1is in Economics

Masters in financial Economics

Year

1nv1ew

University of Abuja (Nigeria)

Bayaro University Kano Nigeria

AhmacluBallo University Zaria

Jigawa State College of education

(Gumel)

Masters in Treasury Management

BAED Economics

2000-2013

2007-2009

1989-1992

1984-1987 NCE Mathematics/Economics

GovtSecondarySchool Ringim Senior Secondary Certificate

SabonGarinYaya primary School Primary School Certificate

WORK EXPEREINCE

Classroom teacher

Ministry if education Kano state Nigeria

Classroom teacher

ivtinistry of educntionJig,l\\aState Nigerin

C !ass room tench er

Jigawa state college of education Gurne\ Nigeria

Lecturing

95

1977-1983

1970-1977

l 987-1989

1992-1993

1994-clate

OTHER RELEVANT DAT A

Class teacher

House master

Kitchen master

Head of Department Economics

COE Gumal Nigeria

LANGUAGE PROFICIENCY

LANGUAGE

English

Hausa

REFEREES

Dr. UmmaAbdulwaheed

Director school of remedial

Studies SuleLamido

UniversityKafin Hausa

Dr. DahiruAbdulkadir

WRITTEN

Very good

Excellent

Provost Jigawa College of education Gumel

Dr. Yalwa Mohammed

Department o t' economics

University of Abuja

Dr. A bugalsac

Kampala International University

Prof essorDezi

Kampala International University

96

1987-1989

2000-2006

SPOKEN

very good

Excellent

APPENDIX IX: TREND OF FDI NET INFLOWS TO NIGERIA 1984-2014 (US$)

Year - FDI Inflow (US$) 1984 115,164,785 1985 485,581,321 1986 193,214,908 1987 610,552,091 1988 378,667,098 1989 4,692,249,739 1990 485,581,321 1991 193,214,908 1992 610,552,091 1993 378,667,098 1994 1,884,249,739 1995 1,079,271,551 1996 1,593,459,222 1997 1,539,445,718 1998 1,051,326,217 1999 1,004.916,719 2000 1,140,137,660 2001 L 190,632,024 2002 1,874,042,130 2003 2,005,390,033 2004 1,874,033,035 2005 4,982,533,943 2006 4,854,416,867 2007 6,034.971,231 2008 8,196,606.673 2009 8,554,840.769 2010 6,048,560,266 2011 8,841,952,775 2012 7.101.031.884 2013 5.609,000.000 2014 4.808.400.000

Source: ·world Bank (2015); Central Bank of Nigeria (2014)

97

....... -{;A-

~ -~ .Q I.I-

i5 1-1

r:2

Jrend of FDI Inflow in Niger,a in th~ period 1984 to 2014

9500000000 9000000000 8500000000 8000000000 7500000000 7000000000 6500000000 6000000000 5500000000 5000000000 4500000000 4000000000 3500000000 3000000000 2500000000 2000000000 1500000000

7-r-r4-7-r-r4-7-r-r1-1-,-r,-1-T-r,-4-T-r-r4-T-r-r4-T-T l_L_LJ_l_L_LJ_l_L_LJ_J_l_LJ_J_l_LJ_J_l_L_LJ_l_L_LJ_l_l I I I I I I I I I I I I I I I I I I I I I I I I I I 1 I I I +-~-h~-+-L-h~-+-~-h~-4-+-h~-4-+-h~-~-+-~-h~- -L ~-+-+ I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I T-r-r4-T-,-r4-7-r-r,-1-T-r1-1-,-r1-4-T-,-r - -r 4-T-r I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I T-r-r7_T_r-r7-T-r-r7-,-T-r7-,-T-r7_7_T_r_r -Tr r -T-T +-L-h~-+-~-h~-+-L-h~-4-+-h~-4-+-h~-~-+-~- ~-+ -h +-+ I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I +-r-r7-+-r-r7-+-r-r7- ➔ -+-r7-➔-+-r7-7-+-r- 7-+- -r7 +-+ I I I I I I I I I I I I I I I I I I I I I I I I I I I I I T-r-,-7-T_f_1_7_T_r_r-,-,-T-r-,-,-T-r-,-7-T-r-· 7-T-" -,-7- -y i_L_LJ_i_L_LJ_i_L_L~-~-L-L~_i_L_L~_J_i_L LJ_i_L_L~- _L I I I I I I I I I I I I I 1 I I I I I I I I I I I I I I I I I +-~-~~-+-~-~~-+-~-~~- ➔ -+-~~- ➔ -+-~~-~- - -~~-+-~-~~-+ I I I I I I I I I I I I I I I I I I I I I I I I I I I T-,-r7_T_ -r7-T-,-r7-,-T-r7-,-T-r7-7- -,-r7-T-,-r7-T-T l_L_LJ_l __ LJ_l_L_LJ_J_l_LJ_J_l_LJ_J_l_L_LJ_l_L_LJ_l_l I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I +-~-~~-+ -~~-+-~-~~- ➔ -+-~~- ➔ -+-~~-~ +-~-~4-+-~-~4-+-+ I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I T-,-r4-, ,-r4-,-r-r1-1-;-r,-1-,-r1-4 7-r-r4-T-,-r4_T_T l_L_LJ_l L LJ_l_L_LJ_J_l_LJ_J_l_LJ_J l_L_LJ_l_L_LJ_l_l I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I +-~-h~-+ ~ h~-+-~- ~-4-+-h~-4-+- -+-~-h~-+-L-h~-+-+ I I I I I I I I I I I I I I I I I I I I I I I I I ;-;-r4-T-, r4-T-, n-. "-r1-,-; r,-4-T-,-r7-T-,-r4-T-T I I I I I I I I I I I I I . I I I I I I I I I I I I I T-r-r7- -r -7-T-r r ,-r- -r-r7-7-T-r-r7-T-r-r7_T_T +- -h -L ~- -h~-4-+-h~-4-+-h~-~-+-L-h~-+-L-h~-+-L

I I I I I I I I I I I I I I I I I I I I 1 I I I -r- 7-+-r-r -+-r-r7- ➔ -+-r7- ➔ -+-r7-7-+-r-r7-+-r-r7-+-+

0*0~0~~qj).f:!0;;::f?~~~oJ-,0~* ~6?0d?$~~6/!v&~~<S-,,f)0,f)r:S-,ff9,f)~&\~#~"~1)v,f)◊~~ Year

Source: \Vorld Bank (2015); Central Bank of Nigeria (201.t)

98

APPENDIX X: NIGERIA'S GDP GROWTH (1984-2014)

Year GDP, bin. US Dollars GDP per capita, dollars GDP Growth Rate Current Prices

1984 180.2 2204 -1.2 1985 178.8 2131 11.3 1986 90.4 1050 1.9 1987 55.8 631 -0.79 1988 67 738 7.7 1989 60.5 650 7.1 1990 68.3 715 11.4 1991 64 652 0 1992 58.1 577 2.7 1993 56.7 549 1.6 1994 47 445 0.79 1995 49 452 2.1 1996 52 468 4 1997 54.4 477 2.9 1998 56.5 484 2.9 1999 57.7 481 0.35 2000 74.6 607 5.4 2001 71 563 4.4 2002 95.1 736 21.4 2003 108.8 821 10.2 2004 141.3 1039 10.5 2005 180.5 1293 6.5 2006 233.9 1632 6 2007 267.7 1819 6.5 2008 334.6 2213 6.3 2009 272.5 1754 6.9 2010 369. l 2311 7.9 2011 411.7 2508 4.8 2012 461 2730 4.3 2013 515 2966 5.3 2014 522.6 1097.97 6.8

Source: vVorld Bank (2015); Central Bank of Nigeria (2014)

99

Trend of GDP of Nigeria in the period 1984 to 2014

540

480

420 !I) I-

.m 360

B 300

~ C: 240 :s

Q.. .. 180 s 120

60

~~#$~~ff~~$$0j~~~~~~~~#~~~~fi&~~~,d' ~ ~or~ ~''v9~ ~'~ 'v~'~ '9'v'v v~ ~~-v ~~ ~~~ ·v v~ ~ ~ ~-v

Year

Source: ·world Bank (2015); Central Bank of Nigeria (2014)

100

APPENDIX XI: TAX RATE IN NIGERIA 1984 - 2014

Year - Tax rate(%) 1984 35 1985 35 1986 35 1987 35 1988 35 1989 35 1990 30 1991 30 1992 30 1993 30 1994 30 1995 30 1996 30 1997 30 1998 30 1999 31.4 2000 31.4 2001 31.4 2002 31.4 2003 31.4 2004 31.4 2005 31.4 2006 32.2 2007 32.2 2008 32.2 2009 '"'?? .) ___

2010 "?? .) ___

2011 32.6 2012 33.8 2013 33.8 2014 33.8

Source: 'World Bank (2015); Central Bank of Nigeria (2014)

l 01

35.6

35.2

34.8

34.4

34.0

...... 33.6 ~ 0 33.2 '-" (!,J 32.8 ... !ti i.. 32.4 >< {J. 32.0

31.6

31.2

30.8

30.4

30.0

Trend of Tax Rate in Nigeria in the period 1984 to 2014

T-T-T-,-,-,-,4-7-,-1-T-T-,-,-,-,-,4-,-;-;-T-,-,-,-,-,4-4-,­I I I I I I I 1 I I 1 I 1 1 I I I I I I I I I I I I I I I I I +-+-+-~-~-~-~4-4-4-4-+-+-+-~-~-~-~4-4-4-4-+-+-~-~-~-~4-4-4-

I I l I l I I I I I I I I I I I I I I I I I I I I - _ -L- - _L~_J_J_J_i_L_L_L_L_L_L~_J_J_J_i_L_L_L_L_LJ_J_J_

I l I I I 1 I I I I 1 I I l I l l l I I I I I I I I I I 1 I I l I I I I I I I I I I I I I I 1 1 I I I I I I I I I I I I I T_T_T_r_r_ -r7-7-7-,-T_T_T_r-r-r-r,-7-,-,-T-T-r-r-r-r,-,-,-1 I I I I l I l I I I I I I I I I l I I I I I l I l I I I I I +-+-+-r-r- -r7-7-7- ➔-+-+-+-r-r-r-r7-7-➔-➔-+-+-r-r-r-r7-7-7-1 I I I I I I I I I I I I I I I I I I I I I I I I I I I 4-4-L-~-~- -~~-~-~-4-4-L-L-~-~-~-~~-~-4-4-4-L-~-~-~-~ -~-~­I I I I I I I I I I l I l I I I I I 1 I I I I I I I I I I I I i_i_L_L_L _ _ LJ_J_J_J_i_L_L_L_L_L_LJ_J_J_J_i_L_L_L_L_LJ_J_J_ I I I l I I I I I I I I I I I I I I I I I I I I 1 I I I I I I I I I I I I I I I l I I I I I I I 1 I I I I I I I I I I I I I T-T-r-r-r-r-r7-7-7-,-T-r-r-r-r-r-r7-7-,-,-T-r-r-r-r- 7-7-7-1 I I I I I I I l I I I I I I I I I I I I I I I I I I I I I +-+-+-~-~-~ ~4-4-4-4-+-+-+-~-~-~-~4-4-4-4-+-+-~-~-h ~4-4-4-1 I I I I I I l l I l I l I I I I I I I I I -----~ I I I I i_i_L_L_L_L LJ_J_J_J_i_L_L_L_L_L_LJ_J_J_J_~_L_L_L_L-LJ_J_J_ 1 I I I I I I I I I I I I I I I 1 I I I I I I I I I 1 I I I I I I I I I I I I I I I I 1 1 I I I I I I I I I I I I I 1 I l I T_T_T_r-r-r r7-7-,-,-T_T_T_r_ ----,- - - T-T-r-r-r-r,-,-,-1 1 I I I I I I I I I I I I I I I I I I I I I I T-T-,-,-,-, ,4-,-,-1-T-,-T-, ,-,-,4-,-1-1-1-T-,-,-,-,4-,-,­I I I I I I l 1 I I 1 I I I I I 1 l I I I I I I I I I I I I l +-+-+-~-~-~ ~4-4-4-4-+-+-+-~ ~-~-~4-4-4-4-+-+-~-~-~-~4-4-4-l I I I I I I I I I I I I I 1 I I I I I I I I I I I I I I I I i_i_L_L_L_L _J_~_J_J_i_L_L_ -L-L-LJ-~_J_J_i_L_L_L_L_LJ_J_J_ I I I I I I I l I I 1 I I I I I I I I I I I I I I 1 I I I I I I I I I I ~~-►•~-►♦~-• ! 1 I I I 1 I I I I I I I I I I T-T-r-r-r-r -r-r-r7-7-,-,-T-r-r-r-r-r7-7-7-

~~~~~~~~w~~~~~~~~~~~~~~~~~~~0~ ~◊◊~~◊◊~~-◊◊~-~◊◊~~~~~~~~~~~~~~~~

Year

Source: World Bank (2015); Central Bank of Nigeria (2014)

102

Appendix XII: Tax Incentives in Nigeria from 1984 to 2014

Year Tax Incentives(%) 1984 6.7 1985 6.7 1986 6.7 1987 6.7 1988 7.5 1989 7.5 1990 7.5 1991 7.5 1992 7.5 1993 7.5 1994 7.5 1995 7.5 1996 11.0

1997 11.0

1998 11.0

1999 30.8 2000 30.8 2001 30.8 2002 30.8 2003 30.8 2004 30.8 2005 30.8 2006 31.6 2007 31.6 2008 31.6 2009 31.6 2010 31.6 2011 32.1 2012 32.5 2013 32.7 2014 32.7

Source: \Vorld Bank (2015); Central Bank of Nigeria (2014)

103

33

30

27 'o' ~ 24 VI (l)

-~ 21 .., C:

/3 18 iS X 15 ~

12

Trend of Tax Incentives in Nigeria in the period 1984 to 2014

_,2i32·- . 30.830.810.830. 8l0. Sl0.810,g3LSl.6ll. 6ll.6l1. tr .

11.CU.D.1 0

9- 7.57.57.57.57.57.57.57."'

6 6.7 6.7 6.7 6.7

'~~~@~W~~0~~~~~~&N&&~~~~~&~y~◊~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Year

Source: World Bank (2015); Central Bank of Nigeria (2014)

104

APPENDIX XIII: SUMMARY OF ALL VARIABLES EXERCISED IN THIS STUDY

:riable Explanation - Unit Source

,pendent

lriable:

)1 Inflow Net foreign investment to Nigeria US$ World Development

Indicator

dependent

triable:

1x Incentives The presence or absence of Tax Incentive (TI) Dummy Nigeria's Regulation

Provision in the tax policy represented by: Variable (Tax Policy)

l for presence of TI

0 for absence of TI

LX Rate Highest Statutory tax rate according to Nigeria's % Nigeria's Regulation

Tax Policy (Tax Policy)

DP Growth GDP Grmvth as percentage increase or decrease % World Development

of Nigeria's Indicator

Source: Federal Office of Statistics

105