Impact Of Taxation On Foreign Direct Investment In Nigeria

Impact Of Taxation On Foreign Direct Investment In Nigeria  (1980-2004)

Impact Of Taxation On Foreign Direct Investment In Nigeria  (1980-2004)

According to Adeyemi, (1997) “one attribute that is central to the various derogatory “nicknames” of the third world are Under Developed Countries, Less Developed countries (LDCs), Developing countries, e.t.c. Is it that these countries’ economies lack adequate resources to gainfully engage the available human and material resources of their countries?

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While many countries of the world are enjoying a “virtuous” economic cycle as we move towards the end of this second millennium; members of less developed countries are suffering from vicious economic cycle of poverty. It is becoming increasingly difficult for them to witness reasonable standard of living without external injection of resources as the circular constellation of forces (i.e. low income, low savings, low investment and low production) which and react upon one another are keeping these countries in perpetual poverty. A general belief for a country to develop rapidly is for it to industrialise since industrialised countries appear to be most developed. However, to industrialise, countries requires substantial capital investment, which is possible through either earning of foreign exchange for exports, borrowing or the international financial markets or allowing foreign business men to invest in her economy.

Since the beginning of the oil glut, earnings of Nigeria economy from export had been fluctuating downward with the consequent debt crisis pushing the economy into depression to the extent that the international financial community are reluctant to grant further extra credit facility until there exit a practical demonstration of improved ability to pay. Unfortunately, the alternative Official Development Assistance (O.D.A., at concessional low interest rate had persistently witnessed declining trend due to the country’s political impasse. Thus in spite of the various attempt at industrialisation, Nigeria is still characterised by dominance of primary commodities, dependence on external sources of most factor input such as capital gods technology as well as essential specialised services.

The Federal Government in recognition of the importance of foreign investment as an important vehicle for industrial progress in her 1997 budget expressed here readiness to enter into bilateral agreement with foreign governments, or private organisations that wish to invest in Nigeria as well as discuss the additional incentives.

However, Agbachi (1998) advised that “no country should over rest on her oars and expect fortune seeking foreign investors to develop her economy for her. It is up to the recipient economy of foreign investment to “exploit” the foreign investment through the judicious use of her macro-economic policies deliberately designed to take advantage of the available foreign investment for the national economic benefits.”.

According to Anyafor, (1996) “Taxation as a macro-economic instrument that could be used by government refers to compulsory payments by individuals and organisations to the relevant inland or internal revenue authorities at the federal state or local government levels”.

Taxes are sums of money that government imposes in accordance with some established criterion such as net profit earned, property owned, income received, e.t.c in order to raise revenue to provide services which can be most efficiently provided by the state than by individuals themselves. The services provided in return are without charge but the payment of the tax does not in itself enable the tax payer to receive any government services to which he would not otherwise be eligible. He argued that the basic distinction between taxes and other sources of government revenues is the compulsory element involved. The tax payer has no choice in the matter if eligible for payment on the basis of the predetermined standard. Every tax imposed on an organisation need continual interpretation of its specific applicability and effects on various transactions of the organisation. The fields of taxation changes everyday as new rules and edicts are made, every business organisation must therefore be alert to such changes precedents.

Since its inception, taxation of corporate income had been a pervasive force tending to influence the economic decisions of business entities. On the part of government, there had been numerous economic measures geared toward controlling the adverse economic conditions in the country. Among such measures are tax rules are designed to increase revenue and accomplish other economic goals. But invariably, these rules significant impact upon business and investment decision. In other words, any rational decision should be based on after tax consideration.

The aim of this research is to evaluate the impact of taxation as the macro-economic policy used by government, so as to ascertain its effectiveness in encouraging the flow of foreign investment in the country and how foreign investors react to tax policies in Nigeria.


Nigeria is like a country caught in a web on the role of foreign capital in her quest for development. The realities of Structural Adjustment Programme (SAP) and the imperatives of a balanced of payment equilibrium, as well as the burden of our current external debt services ratio, combined to make injection of foreign capital a sine qua non for economic recovery and accelerated development.

On the other hand, we are aware that the inflows of foreign capital are not clarity. Agbachi (1998) noted that foreign investors are no Santa Claus. They invest in an economy to primarily maximise their returns. In the course of this, the foreign investor is said to have emasculated and preyed on domestic economy, thus retarding real growth. Despite these changes, the foreign investors are not entirely predacious in his operations in the domestic economy. Influx of foreign capital consequent upon his investment is known to have served as both a fillip and catalyst to growth and development.

Nigeria is therefore in dilemma she is in dire need of foreign capital for the on-going internal adjustment, yet she fears that commanding heights of some sectors of the economy may wrest complete control of the national economy and render it an appendage, the need for foreign capital has become indispensable if the economy must come out of the woods, similarly, most of the economic blue prints that have been recommended on the inevitability of foreign capital.

A critical look at the inflow of foreign private investment into Nigerian from World Bank report displays a very distributing development. While the net flows into the less developed countries have been growing steadily since 1989, the share of the increasing flow attracted into Nigerian economy maintained a consistent decline to less developed by 1993 ($ 900. 00 million). On the contrary, the report stated that China attracted $26 billion worth of foreign private investment (FPI) in 1993 representing 39.0 percent of the total flow in the entire less developed countries in spite of her long restrictive policies and her only recent liberalisation policies.

The question now is, to what extent has the Nigerian tax policies contributed to the decline in the flow of foreign investment or are there any other factors apart form the tax rules that affected the inflow of foreign capital into the economy.


The objectives of this study are as follows.

1. To ascertain the level of Foreign Direct Investment in Nigeria.

2. To ascertain the relationship between taxation and Foreign Direct Investment (FDI).

3. To evaluate the impact of such tax regulation on foreign direct investment in Nigeria.

4. To ascertain whether tax consideration have an impact on foreign investors and their investment decisions.

5. To ascertain the adequacy of the level of fiscal incentives to foreign investors by the Nigerian government.

6. To proffer solutions to any problems discovered in the course of the study.


In order to find answers to the questions raised in the research question, the following hypotheses are necessary;

i. H0: Taxation has not made some significant impact on the inflow of Foreign Direct Investment (FDI) in Nigeria.

ii. H1: Taxation has made some significant impact on the inflow of Foreign Direct Investment (FDI) in Nigeria.


Since the realities of the Structural Adjustment Programme and imperatives of balance of payment equilibrium, as w ell as the burden of our current external debt services ratio, combined to made the injection of foreign

capital a sine qua non for economic recovery and accelerated development, it is anticipated that the government will benefit immensely from this study since it is aimed at discovering the loop-holes in its tax regulation which will be detrimental to the realisation of its objectives, and also determine tax regulations that would encourage the growth of foreign investment while enhancing total revenue.

The significance of this study also centres on the need for taxation to be properly planed and optimally utilised for the achievement of organisational goals.


Nigeria tax regulations are too numerous and varies according to the analyst’s interest(s). No study of this nature can afford to examine all the tax laws. For this reason therefore, only the Company Income Tax Act ( CITA) will be analysed. However, mention will be made to other tax laws where necessary. Also, since the field of investment is too vast, one can safely say that it runs through all aspect of human endeavour. This study will focus on foreign direct investment in the manufacturing and processing industries.

A study of this nature cannot be carried out without difficulties; of which one of the limitations are that data for this study are based on secondary sources.

And the scope of this study covered period between 1980-2004.

The researcher encountered the following constraints.

I. TIME CONSTRAINT:- A study of this magnitude requires more time than that which was given to the researcher (one academic year). Also the available time was combined with his academic programme.


This study was carried out by a student researcher and based on this; at the time of the study, there are a lot of disruptions as have been ever experienced by this researcher in the pursuit of this academic work. The motivating factors and joy which guides the researcher were not there hence the timing for research and academic works could not be properly schedule.

III. FINANCIAL CONSTRAINT: The financial strength of the researcher as at this same period was also a setback as it made things a little more difficult due to inadequate finances to travelling to certain areas of interest to this study.






According to Nwadikom (1985), foreign investment is a type of investment whether in real or financial assets across the national boundaries of the investors it can be undertaken, by individual firms or government.

Basically, foreign investment falls into two broad categories, portfolio investment and direct investment.

2.1.1 Portfolio Investment

This is an investment in which the investors lack control over the investment. This typically takes the form of investing in financial assets such as bonds and stocks; and in which case the investors does not have a controlling interest.

2.1.2 Direct Investment

By direct investment, we mean an investment in a foreign country where the investors retains control over the investment. This typically takes the form of a foreigner or a foreign manufacturing firm sets up a subsidiary of their home manufacturing firm and takes over the control of the existing firm in the country of its establishment. Uzoma (1998) asserts that direct foreign investment involves the internationalization of product in order to service markets, which were served by export. Also, Casson (1979) was of the view that foreign direct investment is distinguished from other form of foreign investment by the fact that it involves not only foreign investment ownership but also foreign management and control. In other words; foreign direct investments occurs only if an individual or organization in a foreign country gains sufficient interest in an operation to acquire control of that investment. Therefore, foreign direct investment as a concept differs from international or foreign investment which is a much wider concept. Thus, for instance, if an individual or organization from Britain were to buy stocks in any amount of long or short term bonds in Nigeria, then ad foreign investment would take place through any or a combination of these transactions. But these types of assets are nonvoting assets. Therefore, these transactions are not foreign direct investments.

According to International Monetary Fund (1997), foreign private investment is defined as investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor, the investors purpose being to have an effective voice in the management of the enterprise. The foreign entity or group of associated entities that makes up the investment is termed the direct investor. The unincorporated or incorporated enterprise, a branch or subsidiary respectively in which foreign direct investment is made referred to as a direct investment enterprise.

The above definition was modified by the committee on international investment and multinational enterprise or the Organization of Economic Corporation and Development (OECD) to give adequate guidance on the technical problems faced in measuring direct investment. It therefore adjusted for political purposes the definition of Foreign Private Investors (FPI) in their report of June (1982) as follows: A foreign direct investor is an individual, an incorporated or unincorporated public or private enterprises, a government, a group or related incorporated or unincorporated enterprises which has a direct investment in a country other than the countries of a residence of investment or investors. From this definition, a direct investment can be recognised as an incorporated or unincorporated enterprises in which a single foreign investor either control 10% (ten percent) or more of the ordinary shares or voting power of an incorporated enterprises less than 19% (nineteen percent) or non of the enterprises but has an effective voice in the management of the enterprises.

An effective voice in the management means that the foreign investors has the potential to influence or participate in the management of the said enterprise, it does not mean that he must have absolute control.

2.1.3 The Theory of Foreign Investment

Foreign investment placed a large role in the international economy in the period leading to world war: Most of these investment were in portfolio type and Great Britain has 90% of its investment in such investment. Other major countries with portfolio type of investment include France and Germany. Exchange rates were then negligible and political situation stable. These international portfolio investment were then governed by interest rate differentials. Young expanding economics which affect high returns on capital invested could attract money from major leading countries.

The American investors were of a major dynamic type as they were not contented with the small interest rate differential from portfolio investment. A dominant share of the United State capital export consisted of direct investment. However, such direct investment exist more among the developing economies since few of the developing countries could offer attractive investment opportunities and stability in government that could attract foreign investors.

However, since the world has become a global village where factors of production are mobile the issue of foreign direct investment from one country to another move with relative ease. The major forms of entry of ownership include:

1. Wholly foreign Owned: A wholly foreign-owned enterprise usually takes the form of either a branch or locally incorporated company. In the case of branch, such an enterprise conducts the local activities of its parent company without having a separate loyal entity when a foreign owned company is not a branch as defined above but locally incorporated, it has a separate legal entity from its foreign share holders, parties or member. Such an enterprise is a distinct legal entity formed under the applicable business organization municipal law of the host country. When single foreign investors owns or have controlling share of locally incorporated company, it is a subsidiary. However, it is equally possible for a subsidiary to have a number of other owners in addition to the controlling foreign enterprises. This is commonly found among Japanese Transactional Corporations (TNCS) where some different Japanese trading companies in the host economy own shares in a Japanese manufacturing company in the country. A further version is when different foreign transactional corporations have company in the host country-consortium.

2. Joint ventures : A joint venture is a form of partnership between foreign investors and the host economy in carrying out a business activity. The jointness involves in varying degrees; the sharing of control and decision making, risks and profit proportionally to the respective contribution of each party (unless otherwise stated). Technically a joint venture can be either of corporate or contractual type. Under a corporate joint venture, sharing of ownership is through a separate legal entity as the association of both parties is based purely on contract. The right and obligation will be governed by whatever is agreed upon in the contract as well as will be the sharing of profit, risks, ownership of assets, control and decision making. Provided of course that the agreed terms are not in conflict with any law and administrative policies of the host country. Joint ventures is at present time an important “vehicle” for foreign participation in Industry ventures and remains the most common form used in developing countries of Africa and Latin America.

3. Special contractual Arrangement: Though special contractual arrangement are similar to contractual joint venture described above, they differ slightly because of foreign investors share of benefits is determined by the negotiation of a fair investors share of benefits is determined by the negotiation of a fair investors share of fair return for his contribution, liability and risks rather than in proportion to contribution.

4. Technology, management and marketing agreement: It involves the host country; enterprises entering into a contract for the purchase of technology, management or marketing from a foreign enterprise for an agreed price. A kind of buyer-seller relationship is thus evolved. There is not sharing of control decision making liability risk and profit although the foreign partner runs the risk of non-payment in case of non performance of the enterprise. The most prominent types of such business arrangement are licensing agreement eg patent agreement, now how agreement, other technical services agreement eg engineering services agreement, turkely contracts; management and marketing agreement. It is important to note that the extent to which each form of these agreements can be used varies, considerably depending upon the specific sector or economic activity, the nature of technology and the level of domestic technology capabilities available.

5. Sub-contract, co-production and specialization contract Agreement: As opposed to joint ventures, sub-contract, co-production and specialization contract agreement are based on purely contractual arrangements and like the technology, marketing and management agreements do not involve sharing of control and decision making, liability, risk and profit. They differ from the later forms of arrangement in that the technology provided by the foreign investor is only meant to supplement a purchase from the local entity in production or marketing with no ownership of control consideration relating to the subject of joint effort.

2.1.4 Divergence of Views

The increasing prominence of Foreign Private Investment (FPI) through Transactional Corporations (TNCs) in the global arena is silently overthrowing the sovereign powers of nation states to the extent that growth and development are no longer confined to either the comparative advantage theory nor are they any more the prerogative efficiency in domestic macroeconomic management as manufacturer in search of maximum returns on the investment(s) now look beyond national frontiers. Since the world war 11, no sphere of international political economy has generated so much debated than the operation of the transactional corporations(TNCs), particularly their geographical spread across the globe, has been so great as to have no equal in the history of any empire. The way they have integrated the global economy made Gilpin (1987) to say that many of the transactional corporations (TNCs) are extremely powerful ; and posses resources far in excess of most of the member states of the united Nations. With their sizes no single jurisdiction can cope effectively with the global phenomena of the TNCs nor is there an international authority in machinery adequately equipped to alleviate the tensions that stem from the relationship between Multinational Corporations (MNCs) and national states. In fact their operations have compounded the problem of extra territoriality despite the fact that their subsidiary do at times assume the nationality of the countries of their incorporation though the multinationals do not posses legal personality at the international law level, they indirectly influence the context of international to the extent that the United Nations center on transactional corporation have a draft code of conduct for them. It is because the Multinational Corporations are relatively independent internationally and state less force that prompted Ohmae (1990) to state that the multinationals corporations are remolding a borderless world out of the resent. The presence of the MNCs in the international arena has led to continuous debate about the desirability of FPI; the agents of the new international production mid 1970s when two opposing schedule (one supportive and the other resolutely critical) exchange substantiated charges about the impact of FPI on the LDCs.

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The pro-foreign international schools sees foreign investors as adding new resources in term of capital technology, management and marketing to the host economy. To them, FPI are potent enough to improve the prevailing efficiency in the productive sector, stimulate change for faster economic progress, create jobs, faster growth, and improve the distribution of income by bidding up wages in the host economics.

On the contrary, the opposing dependency school drawing their arrangement from marist dependency theory doubted whether foreign investment (that do soak up local financial resources for their own profits) can bring about industrialization because foreign investors see host economics as merely serving the interest of their home countries in supplying basics needs for their companies. They are thus seen as “Imperialistic predators” that specialized at exploiting the entire globe for the sake of corporate few as well as creating a wet of political and economic dependence among nations to the detriment of the weaker ones (i.e. host economics in Less Developed Countries). The school asserted that TNCs impose inappropriate technologies (developed in response to the labour/capital ratio in their home countries) on the unsuspecting host economies; make insufficient transfer of technology at too high cost (to retain their technology advantage) and exert serious strains on the balance of payment of the host economies; they also set artificial transfer prices to extract excessive profit. As part of TNCs the foreign firms in a host country may be less able than firms under domestic control to expand exports as envisaged and may in fact be dependent on inputs from other affiliated within the same TNCs system. With the sole aim of crowding out domestic producers, foreign investors call for government initiative when they think it will serve the interest of the bourgeois imperialist alliance, but vehemently oppose it when they think it will harm their interest. TNCs are capable of escaping the full impact of host countries laws by side stepping tax obligations, price control and exchange regulations and manipulating prices, interest payment and management renumeration to capture high profit within the frame work of their wide spread affiliation across the gobe. Dependency school warned the TNCs that with the massive nationalization and forced diverstiture which occurred in 1970s, host nations states had not lost completely their capability for possible counter attack in case the TNCs over step their boundaries even in future.

As the “two controversial truths” ie. Pro-foreign investment and dependency schools failed to help the public understand the options and the states in the foreign private investment issue, a third school “Bargaining” mediate between these two extremes and believe that INCs and the host economy can operate on a naturally beneficial ground. They argued that what is needed is a negotiation between the two parties. As the cold war is over and international markets are becoming interdependent, the school maintained that it will be difficult for any government to engage in an outarky policy under the current globalization. The bargaining school submitted that the past anti-foreign rhetoric of the 1970s adversely affected the LDCs where the confrontations were very intensive. On the other hand, the LDCs that operated market friendly policies during the confrontation era, had reaped so much overseas capital to the extent that their current concern now is how to sterilize the capital inflows. Such are found in the south-East Asia and Latin America.


In the search of a realistic explanation for in bound roaming of financial resources as well as international lawyers seem to resemble the proverbial troop of blind people that are meeting an elephant. while those of them that come from the LDCs and are craving for increasing inflows of alien capital resources to compliment their economies shortfall described it as one kind of animal, those from the Developed Countries (DCs). Capitals on exporting nations frowns at its “father Christmas” outlook and thus view it as kind of different animal. From another perspective, the foreign investor themselves (TNCs) who perceives the entire global economy as their constituency of operation (by disregarding national borders) seem located in an entirely animal house in a zoo. In essence, there are no unified theories that can explain all cases of FPI. However, attempts have been made here to present the commonest explanations that determine foreign investment.

2.2.1 Theoretical Explanations

From macroeconomic view point, the contention among various schools of thought with regards to determinant of foreign investment is unnecessary, why? Relevant textbook theories on maximization theory have a consensus agreement that investment that investment should necessarily continue whether within the country or across border until the marginal return from such investment equals the given average cost of capital invested. In other words, prospective host economies of FPI (Foreign Private Investment would continue to import the resources to compliment the domestic deficit in the financing of profitable opportunities until the level where there is no more net benefit from such decisions. A brief look at the following theoretical explanation will suffice.

1. International Trade Explanations

Using the theory of international trade (capital arbitrage and cost capital theory), foreign investors move their capital resources in response to change in rate of return. The capital expected a capital scarce country, in response to higher productivity of capital, until the rates of returns equalizes. That is to say that the TNCs or MNCS move their resources based on profit maximization alone. While this theory is sufficient for explaining portfolio investment, it says nothing about control of effective voice in the management of FPI are more common among developed countries and developing countries or among developing countries or among developing countries.

2. Theory of firm

A further theoretical attempt at explaining the determinant of FPI is that based on the pure theory of firm using microeconomic analysis. With perfect market as a basic assumption, the theory opines that TNCs invest in overseas when their investment at home are likely to suffer diminishing returns to scale. This belief is premised on the desire of the business firms to add to the existing plant and equipment for expanding output as long as they can find a profitable future market for their products. As long as the prospected accumulated future profit margins warrants the present expenditure, the project is seen as being viable. To reach this judgment, anticipated profit margins would have been discounted to obtain their present rather than their future values. Based on Keynes general theory, any project with an internal rate of return that is greater than the market interest rate should be undertaken. At an optimum level, the internal rate of return which in turn equalizes with the market interest rate of return, equalize with the market interest rate and further investments will yield diminishing return. Like its predecessor (theory of international trade) the theory of the firm suffers the same defeat because of its rigid assumption of perfect or market. Again since the optimum size at home country is irrelevant to foreign investment activities; this explanation appears unrealistic for ignoring exporting market.

3. Technological Superiority Explanation

Technology superiority argument is a further explanation as determinants of FPI. Drawing from soderstan (1997) equation we have

 = F (L,C,M)…………………………(1)

Where  denotes the output, L the labour, C the capital and M the managerial skill or organizational technique. If therefore that A is the country of foreign investors, and B is the prospective host economy, then the marginal productivity of M is expected to be higher in country B than in country A (like the theory of international trade).

Thus : D /dm (A) <d/dm (B)……………………..(2)

Since the managerial skills engage higher returns when exported to a prospective host economy (country B) that is not as developed technologically as country A, such exportation is likely to be simultaneously accompanied with centrally as in the demand for both.

4. External Capital Definite Theory:

In the case of external capital requirement theory, FPI is attracted to host economy when the prevailing macroeconomic parameter dictate that such an economy is capital deficient. This is expressed as follows:

(a). Internal gap, foreign capital need (FK)

expressed as Fk-Ir-Sd…………………….(1)

When Fk is foreign capital needed, Ir is total investment required to achieve output target and

Sd is the potential domestic savings

(b). External gap is expressed which is expressed as:

Fk = M- X……………………………………..(2)

When M denotes total import requirements and X is potential export earning .

(c). Foreign debt services requirement (OS) is obtained by specifying the average interest rate and repayment period of future as well as past external debts.

(d). It is expected that foreign exchange reserves grows as development proceeds at d (Fk).

Thus, the total external capital needs (EK), including debt services and change in foreign reserves can now be expressed as: Ef = Fk +Ds + d (Fk)……………………………………(3)

Where Fk is either the internal gap or external gap.

Note; In the national income accounting, export internal gap is always equal to export external gap because Y= C+I+(x-m) and since internal gap 1-(Y-C) = I-sd while external gap is:

M-X at export I-sd = M-X ie FKI –sd = m-x

5. Intangible Assets explanation .

The intangible assets explanations state that FPI of the MNCs have some proprietary knowledge or intangible assets such as technology, techniques that ensure efficiency, patents, designs and trade marks, brand names, trade secrets and know how which other firms have no access to. These assets poses similar characteristics of public good in the sense that they can be exploited by different firms within the Multinational system without depleting their usefulness. Because of these attribute of “pareto Optimality” the use of the proprietary assets can be optimized by expanding abroad. For instance, “Coke” bears name is worldwide and coca cola international will make more returns from the trade name when more bottling plants are constructed. It is important to note that production for export cannot be an alternative to siting a manufacturing plant because of the transportation cost associated with export as well as possibility of trade barriers. Or whether licensing agreement would have been another option, the determination of royalty payment is always very subjective, while government of developing countries do exert severe influence on such an option, and many TNCs are not usually ready to share the assets.

6. Product Cycle Theory.

This theory was developed by Raymond Vernon (1996) and subsequently, given further expressions by other economist. The theory explains that every technology or product evolves through three phases in its life history. The first phase is the introductory or innovation stage. The level where the firm is usually located in the most advanced industrial economies. The second phase is known as maturing or process development stage at which the manufacturing process continue to improve the extent that a similar firm producing the same product is sited in other industrially advanced countries used on the foreign demand of the product. The third phase, which is the standardization or mature stage, allow the production plant to be called and operational in less developed countries especially the Newly Industrialized Countries (NICs) who enjoy comparative advantage in terms of low wage rate. This theory was said to be responsible for the turning around of the “Asian tigers” from their former rural economies to the NICs group.

2.2.2 Host Market Factors

Unfolding the scroll of FPI, one discovers that host economy’s market size dictate to a reasonable extent as a major determinants for FPI. Among often cited reasons are to service the market more effectively, to meet local demand and to maintain or increase market share. These basic reason may be further assisted by home and host governments policies toward FPI. For instance, the home country of the foreign investors may put embergo on the export of certain commodities to prospective host economy or the host may impose trade barriers eg. Tariff, quota, non-tariff barriers or obstruction on the importation of such products. The implication of any or the combination of these factors is that exports to the market will not be possible or made very difficult and thus making a collaboration between the foreign investors and the host economy, the next feasible alternative. The consequent erection of trade barriers makes production behind them very lucrative for the foreign investor to argue that penetration into a host market economy allow them to compete favourably because of a firm in host economy could lead to increasing demand of the firm’s product through increased awareness, desire to purchase a local product and closer liaison between the firm and the market needs.

In addition to presence effect, a further demand stimulating result may be “piggy back effect”. A piggy back effect exists where a production subsidiary is established to produce under a co-production; may stimulate the host economy’s demand for other parts of the range such a subsidiary or affiliate can still play the role of a listening post, to price up ideas and competitive information from the host economy. In a market oriented investment, the decision to invest in host economy is to defend market position which ha been build up by exports or other means and is now threatened by a competitor. In other words, it is the reaction of rivals, both active and passive that forces a market oriented investor to engage in investment decision in a particular prospective host economy. In a research conducted by Scaperlanda and Manner (1969), three principal hypotheses were posed as the motivating factor of foreign investment size of the market in the receiving area, economic growth and tariff discrimination. These hypotheses were tested using the least squares regression technique to determine their relative importance. The empirical data used relate to U.S direct investment in European Economic Community. The study’s empirical test lead to the conclusion that regardless of the time period examined, the only size of the market hypothesis can be supported statistically. Negative findings were discovered for all variants of growth and tariff discrimination hypothesis. These hypothesis were regarded as not statistically significant regardless of the model and time period studied.

2.2.3 Cost Factor

From the theoretical explanation stated earlier FPI is motivated by the desire to maximize profit by maximizing cost. A major element in cost maximization is the search for cheep labour. However, cheap labour alone without reference to the productivity of labour is irrelevant, as high wage rate may be due to high productivity. In addition, the cost of other inputs as well as the potential difficulties arising from operation in underdeveloped parts of the world must be well analyzed. Hence, other factors such as automaton, strikes indirect labour cost, social attitude and technical considerations must be weighed simultaneously with labour cost. It must equally be stressed that an alternative to seeking cheep labour is to substitute capital and advanced technique for out moded machinery and methods of working.

2.2.4 Vertical Integration Factors.

Vertical integration of a firm occurs when the firm is interested at controlling its vital inputs that are located else where apart from its main site whether the sources of such inputs are within the country or broad is not the issue. No wonder the energy and extractive multinationals (like the petroleum companies) are never constrained by the vagaries in the host economy. Their only concern is usually political conflict in the host economy. With the pressure groups who engage in slogans like “it is out oil” what is done by the TNCs at this type is the production of outputs in some part that serve as in out in some other parts of the system, such production of component parts and intermediate goods are done at different locations based on different factors endowments at each location. It may even take the form of contractual production or joint venture agreements in these other location. The argument in favour of such vertical integration of production is to:

(1) Reduce cost by bringing all factors of the production process such as the sources and transfer prices of raw materials and intermediate inputs under the same administrative roof;

(2) appropriate the results of the research and development as well as retaining its monopoly over a long period time, and

(3) Have various stages of production in different locations throughout the world for strategic reasons.

2.2.2 The Investment Climate.

The host country’s investment environment is frequently cited as a supporting motive for undertaking investing abroad. Clearly, the freedom to do business and to make profit is the key element in the evaluation of an investment climate thus “potential stability” is usually the first point of evaluation. Situations as possibility of war, revolution, expropriation and nationalization do defer investments. Investing firm therefore rely on its own substantive assessment of the prospective host economy based on past dealing with foreign investors and on further general knowledge open to it. It is thus the responsibility of host economy to engage in programme that will reduce risk, cut transaction cost and thus instill confidence in the mind of alien entrepreneurs.

2.2.5 Response to External Approach

It is important to note that the factors which triggered the decision to invest abroad in many cases can be an approach from customers, supplier, local agent, and government etc. alerts management to consider investing abroad.

However, such pressures are usually resisted until a proper appraised of the proposal can be carried out without prejudice as some foreign investment have been ruined by a good agent becoming a bad partner. While in others, the local firm, which was the license, did not become the best choice as point venture partners.

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2.3.1 Historical Background

After the Berlin conference of 1884 and the consequent consolidation of British rule in the country, the imperative of colonial economic hegemony were put in place. Lucky enough, the time coincided with the industrial revolution in Europe when most companies were looking for raw materials sources. Activities of alien entrepreneurs were therefore concentrated in export oriented mineral and agricultural production as well as in public utilities, like railway service that facilitate the British commercial activities. The large internal market of Nigeria economy soon attracted foreign investors from France who compete with the British firms and this development led to sharing of the market with price understanding under the auspices of participants Association of West African Merchants (AWAM).

Despite the existence of AWAM, the continue entry of new firms from other parts of the world and the emergence of indigenous enterprenuerial class led to great competition in the country’s commercial activities. By 1950, pioneer manufacturing establishment started emerging because of the incrasing competition as well as response to the demand of the nationalist movement. The immediate post in dependence period witnessed considerable legislation aimed at promoting industrial development of the country. The first national development plan(1962-1968) was launched with the objectives of providing the framework for industrial take off of the economy. The plan was thus, called an “open door” plan which actually saw many foreign investors choosing Nigeria as their sites. However, about five years later when the rest of the worlds were still assessing the policy direction of the relatively newly independent Nigeria economy, the country plunged herself into its first military coup which was followed by a civil war. During this period various controls were put on foreign private investment such as quota, licensing, exchange control, restriction or capital/dividend transfer etc. To crown it all, the act of 1968 was promulgated to replace the united kingdom company’s Act of 1908. the act which made it compulsory for all companies operating in Nigeria to secure incorporation was seen as unnecessary burden by both alien investors as well as other observers. The “bomb shell” which made all the companies is the economy to be subjected to Nigeria municipal laws, by compulsory incorporation was expected to discourage not only existing FPI but as discentive to future in bound oversea capital.

The promulgation of the Nigeria Enterprise promotion Degree (NEPD) of 1972, mass exportation executed by Gowon and Murtala, as well as the NEPD of 1977 gave forced boost to the development of Nigerian capital market as many of the foreign owned firms were compelled into listing on the Nigeria stock exchange. Because of these decrees, existing foreign investors were mandated to transfer their interest to reflect the provisions of the decrees while fresh investors were forced to be engaged in joint ventures. It is difficult to ignore the degree of apathy which the NEPD generated in the minds of foreign investors. This development limits the willingness of foreign investors to continue investing in Nigeria.

That notwithstanding, the Nigerian investment climate has seriously remained unattractive. First, with seven military coups after independence, and unclear democratization process, the political histories of the nation appear rather insecure for overseas capital. Secondly, the unnecessary strignet regulation and approval procedures affecting foreign investors appear frustrating as the usual complaint from most of then centers on the discrepancy between formal rules and informal ones, between the actual content and of the law and the multiplicity of administrative regulations to be observed.

Thirdly, too many changes in policies and regulations altered the rule of the game so frequently that investors kept away from projects with long gestation period to the extent that trading and importation of consumable became the most reliable and profitable business of the import substitution policy in the late 1970’s and early 1980’s made Nigeria to become a dumping ground for all sorts of ideas and projects at exorbitant cost with virtually negative affect for a solid foundation for economic development and growth. Fourthly, according to Aremu (1992) one needed no authority to express that corruption is wide spread in many governmental and public agencies as foreign investors believe that business operations may come to standstill if official hands are not “not wet.” Lastly, the absence of qualified personnel particularly in the manufacturing and processing sector to service imported machineries increased the operational cost of the affected companies since expatriates have to be brought by most of them to plug the domestic short fall at additional cost..

Recently, on his almost one year in the saddle, the vice chairman and chief executive of lever brothers Nigeria Plc, Bob Clake (1998) describe manufacturing of the sectors nightmare according to him include:

1. Poor electricity supply and high cost of own generator.

2. High cost of telephone which is said to probably the highest in the world.

3. High cost of distributions with perennial fuel shortages

4. Problems of adulteration and pass-off that defy attention

5. Liberalization of trade and the resultant disruption of the local market and

6. Lack of effective and reliable infrastructure.

2.3.2 Development to Boost foreign Direct investment in Nigeria.

1. Individual Development Coordinating Committee (IDCC)

For over three and half decades after independence, the inflow of foreign private capital was not very Substential compared with the flow of such investment in countries of similar political history (Malaysia, Singapore and thailand). Despite the world Bank report on the review of incentive system very little was done until the establishment of industrial development co-coordinating committee (IDCC) in 1938. the IDCC was to act as one stop agency for facilitating and attracting FPI inflow into the country with the set up of the committee, the multiplicity of institutions responsible for necessary entry approvals and permit was put to an end as the institutions became the central agency. To this end, it has granted business permit expatriate quota to now investments; grant approval pioneer status, approved status-in-principle and technical/management consultancy agreement fees; administer fiscal incentive in specified area, give approval for pre-investment agreement on related matters. According to a nationwide study carried out by Aremu (1991) the IDCC had performed below expectation when compared to similar institution of concurrent jurisdiction in the South East Asian countries out of the 407 IDCC approved enterprises in the entire economy as at July 1991, only 277 companies could be identified as the remaining,130 were either non existence or were mere arising from the IDCC. The short coming of this committee necessitates its replacement by the new decrees; Nigerian investment promotion decrees 16 of 1995 and the foreign exchange monitoring and miscellaneous provision Decree 17 of 1995.

2. Nigeria Investment promotion commission Decree 16 and the foreign exchange Decree 17 of 1995

According to Omonegbe (1997), the ineffectiveness of IDCC as expressed by Aremu led to the promulgation of the new decrees (decrees 16 and 17 of 1995) to arrest the observed lapses in the IDCC’s operations. The intentions of the decrees are to create conductive environment for foreign investors.

a. The Nigerian investment promotion Degree 16 of 1995: in spite of coming to effect of IDCC, many aspects of Nigeria economy remained incompatible with the high spread operational capital mobility. It included lack of efficiency and rgid operating mechanisms that plague Nigeria” existing administrative system in addition to the absence of a unified highly authoritative leading body for administering foreign investment regulation. Thus, the NPC decree established Nigerian investment promotion commission to coordinate and monitor all investment promotion such as;

1. The initiation and fostering of measures to enhance the nation’s investment climate for all investors .

2. The identification of specific projects and invitation of interested investors to participate the provision of advice to federal Government in policy matter, including fiscal measure designed to promote industrialization for Nigeria of the general development of the economy.

The maintenance of the liaison activities between investors and industries, government department and agencies; institutional leaded and other authorities concerned with investment. According to the decree, a non Nigerian many invest and participate in cooperation of any enterprise in Nigeria with few exceptions such as dangerous drys and military wars.

The foreign Exchange (Monitoring and Miscellaneous Provision) decree 17 of 1995. the decree authorized any person including non-Nigerians to invest in, acquire or dispose of, create or transfer any interest securities and other money market instruments whether nominated in foreign currencies in Nigeria or not. This implies that person many invest in securities trade on he Nigeria capital market private placing in Nigeria. With the coming into effect of FEM Decree the exchange control (Anti-Sabotages) Decree No.7 of 1984 is null and void.

The combine implication of both NPIC and FEM decrees is to remove whatever bottlenecks, distributing massive inflow of FPI into Nigeria by making the investment climate very transparent like the south East Asian countries.


Although the scope of the tax system covers both direct and indirect taxes, in this evaluation, attention will be focused on direct taxes. Unknown to many people, the objectives of the tax system are multi-divisional they should be taken together in designing a sound tax policy. Over the ages, the goal of taxation is to raise money for government. But in the modern times, the objectives of taxation have gone beyond the frontiers of only to raise money for government as enoncosly believed by some people. Concisely, the objective of tax system includes:

1. Revenue generation function

2. resources allocation function

3. Fiscal tool for stimulating economic development.

4. Social function, like redressing the rural-urban population drift, curbing environmental pollution as well as making every body a responsible citizen in the society, the system involves a tripartite aspect namely the tax policy, the tax law and the tax administration.

Each of these aspects will be discussed briefly.

1. The tax policy: According to Maiyeju (1978) policies are general statement of intention which guides the thinking and actions of all concerned towards the realization of the set objective. Since 1992, government has been consistent in the following tax policies:

(i) Pursuance of low tax regime with the aim of reducing individual tax burden and encourage savings and investment.

(ii) Deliberate movement of emphasis income ax to consumption tax which is less prone to tax evasion.

(iii) Introduction of self assessment scheme to encourage tax Payers to participate in the tax assessment process which in considered to e more democratic in nature and realistic in approach.

(iv) Movement from the traditional coercive method of taxation of voluntary compliance.

(v) Using due process of law and mechanism of an efficient tax administration to curb tax evasion and avoidance.

2. The tax law: Going down memory lane, income tax was first introduce in Nigeria in 1904 by lord Laggard when he was British High Commissioner for Northern Nigeria. Hitherto, taxes were paid in kind with the issue of land revenue proclamation of Northern Nigerai; he made changes which culminated in the revenue proclamation of 1960. in 1918, an amending ordinancenative revenue ordiance that extended the provision of the 1917 native revenue proclamation to southern Nigeria was passed. The ordinance applied to Abeokuta in 1918, it was extended to Eastern Nigeria. However, Oyediro (1972) asserted that it was not until 1939 that the ordinance imposing and regulating tax on companies was enacted. This was company income tax ordinance of 1939 (No 14). According to Oregbo (1979), the ordinance imposed income tax on any company incorporated or registered under any law in-force in Nigeria, any company which carried on business on his office place of business there in. it made detailed provision for the imposition and administration of tax. The native revenue ordinance of 1919 an 1923 was later incorporated in the direct taxation ordinance (No4) of 1940 which provided both the taxation of individuals in Lagos and of companies.

According to Ola (1984), the ordinance was discriminatory and applied to natives in Nigeria else where than the township of Lagos. He maintained that tax policy then appeared to be on a choice between bureaucracy and the democratization of the tax system, (the introduction of political a representative into the system) and the former was preferred and practiced. With the introduction of the federal system of government in 1954 the section of the income tax ordinance that regulated the taxation of companies was deemed to be federal legislation. The ordinance became chapter 85 of the laws of Nigeria 1958 when it was replaced by the company income tax Act of 1961. this was in carrying out the recommendation of the fiscal commission of 1958. although the 1961 company’s income tax Act (No 22) was a turning point in the history of this subsequent decrees that were promulgated since 1966 have continue to change the face of the company taxation in Nigeria. The 1961 Act as amended to date ceased to have effect with respect to tax on income or profit of companies for all years of assessment beginning from 31st day march 1977. Companies income tax decree (No. 28) repealed and re-enacted it subsequent amendments to this decrees have been mainly in the are of capital allowance and the tax rate.

The petroleum profit ordinance was passed in 1959, effective as January 1958. taxation is based on law therefore, there is no taxation without representation. The tax law lay the basis of assessment, collection and accounting for the taxes, the person and entity to be taxed, the tax jurisdiction, the scope and powers of the tax authorities, the right and obligations of the tax payers, and how grievances and appeal against arbitrary or unfair assessment are to be dealt with one clearly stated in the law.


The effectiveness of tax policy in altering investment behaviour is an article of faith among both policy makers and economists. Whatever the grounds for this beliefs, its influence on past war tax policy in a country like United States has been enormous. In 1954 and again in 1962, amortization of capital expenditure was liberalized by providing for faster write offs. Since 1962, a tax credit expenditure on equipment has been in force. As Otito Eckstien 91984) pointed out; tax devices to stimulate investment have certainly been the greatest fad in economic policy in the past years. In a period when the trend in the direction of more general, less selective devices, all sorts of liberalized depreciation scheme, investments allowances and tax exemptions were embraced with enthusiasm all over non-communist world. Brown, E.C. (1962) said that the customary justification for the belief in the efficacy of tax stimulus does not rely on empirical evidence. Rather, the belief is based on the plansible argument that businessmen in pursuit of gain will find the purchase of capital goods more attractive if they cost less. In their study if the relationship between tax policy and investment expenditure; using the neoclassical theory of optimal capital accumulation, Rober E. Hall and Dale. W. Jargensson 91967) used three major tax revisions in the post War period.

1. The adoption of accelerated methods for calculating depreciation in the internal revenue codes of 1954.

2. The reduction of lifetime used for calculating depreciation on equipment and machinery in 1962.

3. The investment tax credit for equipment and machinery in the revenue act of 1982 they concluded that:

The effect of accelerated depreciation are very substantial, especially for investment in structures, the effect of depreciation guidelines of 1962 were significant but their effects were confined to investment tax credit of 1962 were quite traumatic and left little room for doubt about the efficiency if the tax policy in influencing investment behaviour. These three tax policies they said represents a programme liberalization of depreciation for tax purposes. To get some ideas of the effect of further liberalization they calculated the impact of the adoption of first year write off of investment expenditure. This tax policy they said represents equivalent to treating capital expenditure for tax purposes.


According to Lawrence J.P. 91990) not only the weak nations burden their subject to with taxes, but the citizen of industrialized economics also carry sizeable tax burden ranging from one fourth to one third of their gross national product.

Fair and just taxation is the fundamental principle of modern taxation and is indispensable in obtaining the confidence of the tax payers in tax system. In this regard, it is important that the procedures for calculating taxable income be set forth clearly. The procedure should also induce in both tax payer and the authorities a willingness to abide by the system. A tax system that does not have clear procedures and relies on the arbitrary judgement of taqx authorities is deficient and inappropriate. In order to evaluate the impact of taxation on international business, a case study of the Japan federation of Economic Organization and American Unitary Taxation will be used.

In February 1981, keidanron (Japan Federation of Economic organization) Sent a delegation to the United States to urge abolition of the world wide unitary method of taxing corporate income that has been adopted by more than 10 states. Under World Wide Unitary taxation, all the income of corporate group is combined and subjected to taxation in a state. Stated more specifically, taxation of the income of a subsidiary located in particular state in the United states is calculated on the basis of not only the subsidiary concerned but also the subsidiary’s parent’s company and all other subsidiaries of the parents, regardless of the location. This constitutes the extra-territorial application of law by the local state and it also results in double taxation. Furthermore, companies are forced to spend on inordinate amount of time and money to translate document, convert currency figures and revise their financial statements to meet complicated requirements for disclosure of information.

This development made the management of corporations domiciled in Unitary states to be caught in dilemma of being unable to estimate their taxes or formulate a business strategy because the connection between their business performance and the amount of tax they must pay has been served.

The Japanese corporation in reaction to the tax method became reluctant to invest in states that have adopted the world wide unitary tax method. Below are their statements; corporation F. Reports “We decide not to invest in California because it has a worldwide unitary tax and set up operation in Alabama instead.”

From the above statement, many Keideiren member companies regard the world wide unitary method of taxation as negative factor in deciding where to make their future investments. This goes a long way to show the magnitude of impact taxation on international business.


According to Gidago (1995) Nigeria employs her taxation system to provide incentives for capital consumption on investment in government preferred sector of the national economy, particularly in the area of industrial investment projects.

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In her 1995 budget the government of Nigeria provided the following tax incentives to encourage the manufacturing sector.

i. The absence of any charge of tax on intended grants by banks for manufacture good for exports.

ii. Profits in the form of dividends served from manufacturing companies in petro-chemical and liquidified naturally as sub-sector are exempted from tax.

iii. Expense on research and development are deductible for tax purposes.

iv. Low rate of tax of 20% for small manufacturing companies in the first three years of operation.

v. Absence of restriction on capital allowance in manufacturing companies. In addition, the following tax incentives will apply to manufacturing companies in 1995;

a. Small companies in the manufacturing sectors are to enjoy a lower rate of 20% for the first five years of their operation instead of three years.

b. Small companies in manufacturing sector are now defined as those that make a turnover of les than N1,00,000.00.

c. Dividend from companies in the manufacturing sectors was made free from tax in their first five years of operations. Other incentive as relief under the existing tax laws include:

i. Pioneer status: A tax holiday of between 3 to 5 years is granted to a company declared pioneer industries located in economically disadvantaged local government area is for a non-renewable period of 7 years and an additional 5% capital depreciation allowance over and above the initial depreciation allowance.

ii. Tax relief on investment of infrastructure: 20% of the cost of providing infrastructure are deductible like access road, pipe borne water and electricity which normally should have been provided by government.

iii. Incentive for in-plant Training: These are the training needs undertaken by an industrial establishment that has set up special training facilities. The industry enjoys 20% tax concession for 5 years.

2.7.1 Criticism of Tax Incentive System

The wide spread use of tax incentive has been criticized by tax analysts and other economists, but government agents in developing countries see the scheme as quite useful we shall consider some point of disagreements.

On the inducement effect of tax incentive Taylor 91967) argues that investment responds to a multiplicity of factors and that it is believed that tax concessions are of marginal importance, he argues further that it is better to remove direct impediments that deter investment rather then use tax incentive as compensation for them.

On the same note, Heller, W.W. 91981) noted that special tax concession are relatively ineffective either because levels of taxation in the developing countries are not generally high enough to inhibit investment seriously or because barriers like political instability and restriction on foreign exchange conversion look much large than tax barriers.

Chandlliah R.J 91962) on his part contained that since tax concession is a costly devise, it must be used sparingly. There is a strong case for restricting its applicability t certain industries of national importance .

However, government agents (as in Panama) insist that tax incentive do not involve “costs” since without the induced investment there would be no activity by the pioneer companies to tax. But Taylor argued that it is not possible to determine that a given investment would not have taken place but for tax concession and he continued. It appears quite unreasonable to take the position that in a country like panama there would have been an absence of investment on he part of the exempted firms if there had been no tax incentives. Other argument against the use of tax incentives are:

(a) Equity Dilemma: Tax exemption, if not granted to all firms in the industry, will place some companies in a competitive disadvantage. But if granted to all firms it becomes a general subsidy instead of a method of encouraging new investment.

b. Tax subsidy is a perverse type of subsidy: Income tax relief provides little assistance when it is most needed, namely during he initial period when losses or low profits are sustained. The lower the profits the lower the subsidy and when there is a loss, then there is no subsidy.

c. It is a bigger-my-neighbour” policy: To the extent that tax incentives are meant to attract foreign capital, it is a bigger-my-neigbour policy since developing countries (in competition for foreign capital) compete with respect to tax concessions they offer, hence they are placed in position in which the more incentives they offer, the more they have no offer.

It is for the forgoing reasons that there is a consensus of informed opinion to the effect that tax incentives should be used cantiously and prudently, so said Taylor. However, Heller observed that a very different view of the matter is reflected in tax procedures of India. Very extensive income tax concessions are granted with respect to returns from certain types of economic activity.

Hence, while arguing that the country would be better off in the balance with tax incentives than without tax incentive may be over implications: They appeal to important segments of the politically articulate public governments of developing countries. It is argued may well be indirectly acknowledging their inability to collect taxes effectively, given the high evasion rate through generous use of tax concession. But this argument does not hold.


According to Mike Casangara de Jantscher 91980) a tax haven is a place where foreigners may receive income of own assets without paying high rates of tax on them. Tax haven is used for great variety of operations. The main purpose of those patronizing them is to minimize the tax payers total buden by subjecting at least a part of his income or wealth to a lower effective rate than would otherwise be applicable.

Tax haven operations consists fundamentally in establishing within a tax haven country one or more legal entities such as trusts, personal holding companies or corporate subsidiaries and attributing to then income earned elsewhere in order that it should be taxed at the country’s low rate or perhaps not taxed at all. This objective is usually accomplished by either.

1. Alleviating Income in tax haven countries at low rates of tax, to be withdrawn later and invested elsewhere according to the investors wish or.

2. Artificially shifting business profit from high ***** countries to a tax haven country.

Benefits of Tax Haven

For developing countries or economies, one of the main advantages of being tax haven is the possibility of achieving a high employment level. This is particularly attached to countries with a employment level. This is particularly attached to countries with a narrow resources base which tend to have chronic unemployment problem. Other economic activities are also stimulated by tax haven operations. Construction is boosted, particularly if the country enjoys an agreeable climate. A tax haven country may also attract retrieved persons as residents and their presence provides employment opportunities and helps brings in foreign exchange.

The existence of a large financial sector has other important effect too. It may help a country maintain free and open foreign exchange and payment system. In addition, the advantage of having already accessible financial market is considerable. Government bond issue may be underwritten or subscribed to by foreign bond, thereby making funds available for public investments and economic development. Finally, a tax or fees for which the foreign investment will be liable.

The Draw Back of Tax Haven

Is there a price to be paid for all these advantages? Yes. Firstly, as its main purpose is that of tax avoidance, tax haven arbitrary generates very little intangible assets, therefore, tax haven business is extremely volatile and lack instability. Tax haven activity is sensitive to national and international developments. Within a tax haven country itself the slightest whiff of financial scandal such as prominent band defaulting on its obligations is enough to send investors in search of another tax haven that offers more security.

Internationally, one of the factors that can influence tax haven investment is the attitude of developed countries toward this activity. The measures against the use of the haven taken by them have all had some impact. Also, fluctuation in the world economy and disturbance in international financial markets also affects tax haven activities. Tax haven countries tend to be more vulnerable to external factors than developing countries that are not havens not only are they sensitive to changes in international commodity price but they also indirectly affected by the tax policies of the developed by the tax policies of the developed countries which are beyond their controls.


According to Richard (1980) tax limits are economic in the sense that exceeding them will gravely harm productivity and distribution. They are also political in that governments reorganize the hard economic consequences of excessive taxation and the resistance to it and by to keep taxes within the limits. An absolute limit would prevail if no additional revenue could be obtained by raising tax rates or imposing new taxes.

Tax limits may operate because excessive taxation impairs productive capacity, weakens economic incentive, arouse resistance and evasion, or imposed insurmountable administrative burdens.

Taxation as a matter of fact is limited by the resistance that may be aroused when taxes arise rapidly and are regarded as excessive, resistance may take the form of increased evasion particularly of direct taxes on income, profits and wealth which depend to a great extent on the corporation and voluntary compliance of take payers. Evaders include not only those who conceal profits by involved commercial and financial transaction or the falsification of accounts, but also workers in the “black” or parallel economy.

It is therefore necessary that before tax is imposed, the government should try and know those kinds of activities and resources that could be taxed with relative easy compliance and tax rate of other which will naturally influence the opinion about what is bearable.

In summary, the researcher has tried to evaluate the studies made so far on the impact of taxation on direct foreign investment and other critical issue that are relevant to the study. However, no such study seems to have been made on Nigeria. This research is therefore aimed at evaluating critically how taxation has affected the flow of FPI in Nigeria by using some statistical models.



The methodology to be used in this study is the simple linear regression using the Ordinary Least Squares (OLS) techniques. OLS is used because of its simplicity and the estimates obtained from the method have optimal properties such as linearity, unbiasedness and minimum variances (Koutsoyiannis 2001: 48).


The data used for this research work were from secondary sources. They were time series data on Foreign Direct Investment and taxation from 1980-2004.

They were collected from the under-listed sources:

1. CBN statistical Bulletins.

2. Federal Office of statistics publications.

3. CBN Economic and financial Review Bulletin (various years)


Revenue generated from company income tax was used as a proxy for taxation while annual time series data on Foreign Direct Investment is used as a function of taxation (x).

For the impact of taxation (x) on Foreign Direct Investment (Y), the basic estimating equation in explicit form as:

Y = b0 + b1 x + µ . where:

Y = Foreign Direct Investment, x = Taxation

b0 = Intercept of the modal

b1 = Parameter estimate

µ = Error term

Y is the dependent or endogenous variable while X is the independent or exogenous variable.


At the end of this study, we are expected to know the kind of relationship which exist between Foreign Direct Investment and Company income tax. That is to say the result of the model specified above is expected to be positively signed. And to verify if taxation has made significant impact on foreign Direct Investment or not in Nigeria.


The coefficient of determination r2 will be used to test the goodness of fit of the explanatory power of the independent variable. The value of r2 lies between 0 and 1, that is, 0  r2 1. The closer it is to 1 the better the goodness of fit or the explanatory power of the independent variable and the further away it is from 1 (that is the closer it is to 0) the worse the goodness of fit.

The student t-test will be carried out to test the statistical significance of the regression coefficients. The observed r-ratio (t*) will be compared with the critical t-ratio (t0.25) for a two tailed test at 5% level of significance with n-k degrees of freedom. Where n is the number observations ad k is the number of estimated parameters. If t*< t0.25, we accept the null hypothesis and reject the alternative hypothesis.

The F-test will be used to test the statistical significance of the entire regression plane and the stability of the regression coefficients. The observed f-ratio )f*) will be compared with the critical f-ratio (F0.05) at 5% level of significance and vt = k – 1 and vy =nk degrees of freedom. If f* > F0.05 the regression equation is significant and vice versa.




Having stated the regression mode to be estimated and its methodology in the previous chapter, data on Company Income Tax (CIT) was used as explanatory variable with Foreign Direct Investment (FDI) as dependent variable. The data obtained from the period of 1980-2004 were used from the empirical results for the estimated equations bearing in mind the objectives and hypothesis of the study.

However, each variable in the equation model was analysed and appraised. Thus the use of Ordinary Least Square method analysis in the estimation of the models for a reliable result.

Below presents the regression results or the estimated model.

Table 4a.

Estimation results of Foreign Direct Investment (FDI) model by ordinary least square method.

Variable Coefficient SDT Error T-Ratio

Constant 10.43 3.0 0.175

CIT 0.089 0.051 3.48


R – Squared = R2 = 0.13

Adjusted R2 = R2 = 0.36

F-Statistics = 0.30

Durbin-Watson stat = 4.249

In order to specify the regression model in its reduced from, the empirical results estimated through method of Ordinary Least Square (OLS) regression analysis are shown below:

Y0 = b0 + b1 X1 + U


Y0 = Foreign Direct Investment

b0 = Constant

b1 = Parameter (Coefficent of X1 to be estimated)

X1 = Taxation

U = Stochastic or error term.

Y0 = 10.43 + 0.089

(0.175) (3.48)

It should be noted that the values in parenthesis are the asymptotic T-values.


The regression results above shows that there exists a linear relationship between Foreign Direct Investment (FDI) as the dependent variable and Company Income Tax (CIT) being positive. However, the result indicates that a 1% increase in Company Income Tax (CIT) will lead to about 8.9 percent incentive on Foreign Direct Investment (FDI), that is if t here is 8.9% increase FDI, there will be 1% increase in CIT. the T-value of the explanatory variable is statistically significant passing the two-tailed test of significance at five-percent (5%) level.

However, the regression output shows a positive relationship between foreign Direct Investment and Company Income Tax (CIT) which is in line with the apriority expectation of economic theory.

The overall performance of the independent variables and the estimated model revealed that at about 13% statistically significant, but low at five percent level as determined by the value of coefficient, low at five percent level as determined by the value of coefficient of determination (R2). The Durbin-Watson Statistics used to test the existence of first orders serial correlation is 4.2149 suggesting the existence of auto-correlation.


The hypothesis that was stated in chapter three was tested using five percent (5%) level of significance. Also we shall apply the students T-test, to test for the viability of the individual regression coefficient since the number of observations under study is less than 30 (i.e. n < 30). The hypothesis are stated below:

H0:b1 = 0: Taxation ha not made significant impact on Foreign Direct Investment (FDI) in Nigeria.


Reject the H0 if T* cal > T- tab and accept H0 if T* cal < T-tab. Therefore form the regression result.

T* cal = 3.48. Using a two-tailed test and 5 percent level of N-K = 25-2 = 23,

where N = sample size,

K = total number of estimated parameters.

Therefore the tabulated t-ratio ((t2; t0.05)/2

= t0.025) = 2.07.

The above result shows that the variables are statistically significant. Therefore, form the result above, T* cal.T-tab implying that we reject the null hypothesis and accept the alternative on the proposition that taxation has made significant impact on foreign Direct Investment (FDI) in Nigeria because T* cal > T-tab but not with a big margin.




In analysing the data, the following observations were made significant impact on the inflow of Foreign Direct Investment in Nigeria.

That Foreign Direct Investment made in Nigeria so far as not all that encouraging. That the relationship between foreign Direct Investment and taxation are positive and that the variation in the inflow of foreign Direct Investment attributable to taxation is only 8.9%


Foreign capital and its role in the global economy of nations have remained significantly dominant and controversial. It has not only been a supplement to the available internal resources of the nation for growth and development but its utility has also continued to be a catalyst for rapid industrialization. In a developing economy with low capital base such as ours, foreign Direct investment of sufficient magnitude and relevant becomes a valid complimentary option.

Furthermore, on the issue of adequacy of fiscal incentive, it was discovered that the federal Government has taken bold steps in the right directions through provision of various tax incentives and travelling all over the world asking foreign investors to invest in Nigeria. The argument normally put forward by investors on tax incentive facilities is that although tax incentives ensures speedy recovery of invested fund, these absence when the grace period is over erodes almost all their profit. It therefore means that tax laws inflicts Substantial burden on foreign investors.


The government should provide an investment friendly climate that is able to guarantee rewards to the investors who commit their resources.

The government should judiciously use revenue generated from tax to provide the basic infrastructures like pipe borne water, electricity, good roads and enhanced communications networks that is relatively cheap so as to attract investors.

Improve the macroeconomic environment by putting in place policies that will increase the purchasing power of the populace, since there can not be a market without effective demand.

Ensure that taxes imposed are determined by the considerations of direct effect on investments, efficiency and fairness.

Continuous monitoring of the economic effect of specific taxes on the taxpayer with a view of constantly updating and improving the existing tax laws in conformity with international acceptable standard.

The government should reduce the tax rate and eliminate multiplicity of taxes.

Impact Of Taxation On Foreign Direct Investment In Nigeria  (1980-2004)

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