A comparative assessment of the factors that attract oil sector FDI in Nigeria and Angola

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A COMPARATIVE ASSESSMENT OF THE FACTORS THAT

ATTRACT OIL SECTOR FDI IN NIGERIA AND ANGOLA.

J.W. EGGINK

20672330

Dissertation submitted in partial fulfilment of the requirements for the

degree Magister Commercii in International Trade at the Potchefstroom

Campus of the North-West University

Supervisor:

Mr. R. Wait

Co-supervisor:

Dr. H. Bezuidenhout

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Preface

This dissertation is submitted in partial fulfilment of the requirements for the degree Magister Commercii in International Trade at the Potchefstroom Campus of the North-West University. The purpose of this dissertation is to determine domestic and global factors that influence FDI inflows in the Angolan and Nigerian oil industries. The dissertation explores benefits and costs of FDI and its determinates, as well as how FDI links to current trends in the oil industry on global, regional and national levels. This dissertation should be of interest to decision makers at government and industry level, especially in developing African countries.

Acknowledgements

I would like to thank all friends and family for their continued moral support and motivation throughout the gruelling times. Without your support this study would not have been possible.

Firstly, I would like to thank my study supervisor Mr. R. Wait and co-supervisor Dr. H. Bezuidenhout for their time and effort.

Secondly, I would like to thank my family, not only for being the motivation to undertake the task of furthering my studies, but also for supporting me financially and morally during my studies.

Thirdly, I would like to single out my mother, Dr. M.E. Eggink, for being an inspiration by completing her studies during this period.

Lastly, I would like to thank Elana Joynt and her family for their continued support and motivation throughout the period of this study.

J.W. Eggink

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Abstract

This dissertation focuses on Foreign Direct Investment (FDI) in the oil sector of Africa, more specifically in Nigeria and Angola. A large problem faced by most African countries is their low domestic investment. This is due to the low savings rates in these countries. FDI serves as a supplement to domestic investment and therefore allows for increased production and growth in the region that can ultimately lead to better development. Further, FDI brings forth positive spill over effects that can further increase levels of development in African countries. Therefore, it is beneficial for African countries to achieve higher levels of FDI inflows. The African oil sector has, in recent years, received much deserved attention as Africa supplied approximately 11 percent of worldwide oil supply and the African untapped oil reserves constitute approximately 10 percent of the total worldwide proven oil reserves in 2010. There are currently 19 African countries known to have significant oil reserves and further surveying may increase this number. This dissertation focuses on Nigeria and Angola as these countries are the continent’s largest producers of oil and their oil sectors are the sectors with the strongest FDI inflows. Through economic and policy reforms and increased share in global oil supply, it is believed that these countries can be the drivers of economic growth and development in the region.

Greater FDI is needed to fully exploit the available oil resources. Although many studies have been done on the factors that attract FDI, very few studies have focussed on oil sector specific FDI. Therefore, the aim of this dissertation is to determine and compare the factors that attract oil sector FDI in Nigeria and Angola.

This dissertation undertakes both a literature review and an empirical analysis. The literature review provides an overview of FDI theory, the motives for investment, the types and benefits thereof; an overview of the African and, more specifically, the Nigerian and Angolan oil industry and the influence that FDI inflows have had on this sector. The current FDI inflow trends and oil sector FDI in Nigeria and Angola are reviewed. The dissertation examines and compares the current state of the Nigerian and Angolan oil industries. The empirical analysis consists of a country comparison through four least square regression models (domestic models for Nigeria and

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Angola and global models for both countries) using data between 1990 and 2011 obtained from the World Data Bank and the 2012 BP statistical review. The data used will describe the traditional determinants of FDI inflows as set out in literature review and other determinants derived from past studies of FDI inflows in transitional economies and oil sector dependent countries. In Nigeria and Angola, the problems of lack of accurate and sufficient data over a longer time period persist, as they do in most African countries.

The main findings are that significant domestic influences of FDI inflows in Angola include: lower public power to entice private gain; better policies that are effectively enforced to improve civil and public services; and the proven oil reserves. This entails that government policy, transparency and their oil reserves are held in high regard by the foreign investors in Angola. In Nigeria, however, domestic influences of FDI inflows include: better citizen ability to select a government; freedom of expression; freedom of association and a free media; better ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development; and oil production. This indicates that democracy, government policy and oil production are highly regarded by foreign investors who invest in Nigeria. Therefore, it can be argued that, even though results for factors influencing FDI inflows differ, there are similarities as government policy and the oil sector in general influence both countries even though the issues in both countries are not necessarily the same. However, on a global level, investment in the two countries is driven by completely different factors. According to the models, Angolan FDI inflows are driven by global oil production (supply) in the previous year whereas FDI inflows in Nigeria are correlated to the oil price in the previous year. Both of these models, however, leave much to be desired as they have low R2 values which indicate that they explain very little of what influences FDI inflows in the countries.

Key words: Foreign Direct Investment (FDI); oil sector; oil sector FDI; African FDI; Nigeria; Angola.

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Opsomming

Hierdie verhandeling fokus op direkte buitelandse investering in die Afrika oliesektor en meer spesifiek op Nigerië en Angola se oliesektore. 'n Groot probleem wat ervaar word deur die meeste Afrika-lande is hul lae binnelandse investering. Dit is grootliks as gevolg van die lae spaarkoers in hierdie lande. direkte buitelandse investering dien as 'n aanvulling tot binnelandse investering en daarom kan verhoogde produksie en groei bereik word wat uiteindelik kan lei tot beter ontwikkeling. Direkte buitelandse investering kan ook lei tot positiewe oorspoel-effekte wat die vlak van ontwikkeling in Afrika-lande kan verhoog. Daarom is dit voordelig vir Afrika-lande om hoër vlakke van direkte buitelandse investeringsinvloei te bereik. Die Afrika oliesektor het in afgelope jare baie aandag geniet, omdat Afrika verantwoordelik is vir ongeveer 11 persent van die wêreldwye olieproduksie en Afrika se onontginde oliereserwes maak ongeveer 10 persent van die totale wêreldwye bewese oliereserwes in 2010 uit. Daar is tans 19 Afrika-lande wat noemenswaardige oliereserwes het en daar word verwag dat hierdie getalle in die toekoms kan styg met verdere eksplorasie. Hierdie studie fokus spesifiek op Nigerië en Angola, omdat hierdie lande Afrika se grootste olieprodusente is en die oliesektor die sektor in Afrika is wat tans die sterkste direkte buitelandse investeringsinvloei ontvang. Volgens sekere ekonome kan hierdie lande die dryfkrag vir ekonomiese groei en ontwikkeling in die streek wees as hulle die nodige ekonomiese en beleidshervormings toepas en ‘n groter aandeel in die globale olie-aanbod bekom.

Groter direkte buitelandse investeringsinvloei word benodig om die beskikbare oliehulpbronne te ontgin en in inkomste te omskep. Alhoewel daar al menigte studies gedoen is oor die faktore wat direkte buitelandse investeringsinvloei aantrek, het baie min studies spesifiek gefokus op oliesektor direkte buitelandse investering. Die doel van hierdie studie is dus om vas te stel watter faktore direkte buitelandse investering in Nigerië en Angola se oliesektore aantrek en om die faktore in die twee lande te vergelyk.

Die studie bestaan uit 'n literatuurstudie en 'n empiriese analise. Die literatuurstudie verskaf 'n oorsig oor direkte buitelandse investeringsteorie, die motiewe vir investering, die tipes direkte buitelandse investering en voordele daarvan, sodat 'n

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oorsig gegee kan word van die Afrika en, meer spesifiek, die Nigeriese en Angolese olie-sektore en die invloed wat direkte buitelandse investeringsinvloei op hierdie sektor het. Die huidige direkte buitelandse investeringsinvloei-tendense en oliesektor direkte buitelandse investering in Nigerië en Angola word dan hersien. Die studie ondersoek en vergelyk dan die huidige toestand van die Nigeriese en Angolese olie-industrie. Die empiriese ontleding bestaan uit 'n vergelyking tussen die lande deur vier regressiemodelle (plaaslike modelle vir Nigerië en Angola en globale modelle vir beide lande), deur gebruik te maak van data tussen 1990 en 2011 verkry van die World Data Bank en die BP statistical review 2012. Die data sal die tradisionele determinante van direkte buitelandse investeringsinvloei, soos uiteengesit in literatuuroorsig, beskryf en ander faktore wat afgelei word van vorige studies oor direkte buitelandse investeringsinvloei in ontwikkelende ekonomieë asook oliesektor-afhanklike lande. 'n Gebrek aan akkurate en voldoende data oor 'n langer tydperk is egter ‘n probleem wat voorkom in Nigerië en Angola soos in die meeste Afrika-lande.

Die modelle was geïnterpreteer en vergelyk en die bevindinge was dat beduidende plaaslike invloede van direkte buitelandse investeringsinvloei in Angola die volgende insluit: laer openbare bevoegdheid het om private gewin te bewerkstellig; 'n beter beleid wat effektief afgedwing word om burgerlike en openbare dienste te verbeter; en die bewese olie reserwes te lok. Dit behels dat die regeringsbeleid, deursigtigheid en hul olie-reserwes hooggeag word deur buitelandse beleggers wat belê in Angola. Die beduidende Nigeriese plaaslike invloede van buitelandse investeringsvloei het egter die volgende ingesluit: beter burgerlike vermoë om 'n regering te kies; vryheid van uitdrukking; vryheid van assosiasie en vrye media; beter regeringsvermoë om gesonde beleide te formuleer en te implementer; regulasies wat toelaat dat privaat-sector ontwikkeling bevorder word; en olieproduksie. Dit dui daarop dat demokrasie, regeringsbeleid en olieproduksie hooggeag word deur buitelandse beleggers wat belê in Nigerië. 'n Mens kan dus argumenteer dat daar wel ooreenkomste bestaan tussen die lande se plaaslike invloede op direkte buitelandse investering. Die ooreenkomste dui dat beide lande beïnvloed word deur regeringbeleid en die oliesektor in die algemeen, selfs al is die kwessies in beide lande nie noodwendig dieselfde nie. Op ‘n globale vlak word investering in die twee lande egter deur heeltemal ander faktore gedryf. Volgens die modelle in die bogenoemde afdelings

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word Angolese direkte buitelandse investeringsinvloei gedryf deur globale olieproduksie (aanbod) in die vorige jaar, terwyl direkte buitelandse investeringsinvloei in Nigerië gekorreleer is met die olieprys in die vorige jaar. Albei hierdie modelle laat egter veel te wense oor, as gevolg van hul lae R-kwadraat wat aandui dat die onafhanklike veranderilkes baie min verduidelik van wat direkte buitelandse investeringsinvloei in die lande beïnvloed.

Sleutelwoorde: direkte buitelandse investering; oliesektor; oliesektor direkte buitelandse investering; direkte buitelandse investering in Afrika; Nigerië; Angola.

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List of tables

Table 1.1: Review of studies on African oil ... 7

Table 2.1. Production and reserves of top African oil producing countries (2012) ... 24

Table 2.2. Review of Past studies on determinants of FDI in the oil sector ... 30

Table 3.1 Top 10 African Countries with the biggest proven reserves (2011) . 46 Table 3.2 The 10 largest oil producing countries in Africa (2011) ... 47

Table 4.1 Factors found to have an influence on FDI inflows ... 61

Table 4.2. Renamed identities for variables ... 64

Table 4.3. Conversion to constant prices base year 2005... 66

Table 4.4. Model for domestic factors influencing Nigerian FDI inflows ... 68

Table 4.5. Model for global factors influencing Nigerian FDI inflows ... 71

Table 4.6. Model for domestic factors influencing Angolan FDI inflows ... 73

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List of figures

Figure 2.1. Petroleum fiscal systems ... 28

Figure 3.1. Global FDI inflows 1970 – 2010 (US Dollars at current prices and current exchange rates in millions) ... 37

Figure 3.2. Global consumption 1965 – 2010 (Thousand barrels per day) ... 39

Figure 3.3. Global production 1965 – 2010 (thousand barrels per day) ... 40

Figure 3.4. Brent crude oil price 1980 – 2010 (US Dollars 2011 basis year) ... 40

Figure 3.5. Global oil reserves 1980 – 2010 (thousand million barrels) ... 41

Figure 3.6. African FDI inflows 1970 – 2010 (US Dollars at current prices and current exchange rates in millions) ... 44

Figure 3.7. The 10 largest oil producing countries in Africa (2011) ... 46

Figure 3.8. Total Greenfield FDI in African oil sector (in million dollars current currency) ... 49

Figure 3.9. Nigerian oil production 1965 to 2010 ... 51

Figure 3.10. Total Nigerian FDI inflows between 1970 and 2010 (million US$)... 52

Figure 3.11. Total Greenfield investment in the Nigerian oil sector ... 53

Figure 3.12. Angolan oil Production 1965 – 2009 (Thousand barrels per day)... 55

Figure 3.13. Total Greenfield FDI in the Angolan oil sector between 2003 and 2010 (in million dollars current currency) ... 56

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List of abbreviations

BP: British Petroleum

Bpd: Barrels per day

CIA: Central Intelligence Agency

COMESA: Common Market for Eastern and Southern Africa

CRF: Council on Foreign Relations

EAC: East African Community

EIA: U.S. Energy Information Administration

FAO: Food and Agriculture Organisation

FDI: Foreign Direct Investment

GDP: Gross Domestic Product

IMF: International Monetary Fund

IOCs: International oil companies

LDCs: Least developed countries

LNG: Liquefied Natural Gas

MNCs: Multi-national companies

MNOCs: Multi-national oil companies

NCEMA: National Centre for Economic Management and Administration

NIPC: Nigerian Investment Promotion Commission

NNPC: Nigerian National Petroleum Corporation

NOCs: National oil companies

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OGIC: Oil and Gas sector reform Implementation Committee

OPEC: Organization of the Petroleum Exporting Countries

PIB: Petroleum Industry Bill

PSA: Production Sharing Agreement

PSC: Production Sharing Contract

SADC: Southern African Development Community

SAP: Structural Adjustment Programme

SPE: Society of Petroleum Engineers

UNECA: United Nations Economic Commission for Africa

UNCTAD: United Nations Conference on Trade and Development

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Chapter 1: Introduction and context of analysis

1.1. Introduction: Rationale and context

Africa is a continent with vast natural resources. However, a major problem faced by Africa is the lack of local investment because of the low domestic savings rates. Nevertheless, Africa is a continent with potential, as much of Africa’s natural resources have lain untapped for many years. Foreign direct investment (FDI) has given African countries a way to supplement their lack in investment United Nations Conference on Trade and Development (UNCTAD, 2011). In most oil rich African countries, the oil sector receives the majority of FDI inflows and outweighs all the other sectors combined (UNCTAD, 2011; Levitt, 2011).

Traditionally, FDI in Africa was primarily attracted by natural resources like gold and coal but for some time now the oil industry has been showing an increased ability to attract FDI (Levitt, 2011). The oil sector is currently the highest FDI recipient sector in Africa and is, according to many economists, the continent’s way forward and a doorway to a brighter future concerning sustainable economic growth and development (Levitt, 2011).

Nigeria and Angola are the largest oil producing countries in Africa (UNCTAD, 2011; US Department of Energy, 2011). Further, these countries also have the second and third biggest oil reserves in Africa (BP, 2012; OPEC, 2011). Therefore, these two countries were chosen as subjects as they not only have significant oil reserves and production but are also both heavily dependent on FDI in their oil sectors (UNCTAD, 2011). Therefore, this dissertation will focus on oil sector FDI inflows to Nigeria and Angola. The aim of this dissertation is to identify the factors that influence FDI inflows to the oil sectors of Nigeria and Angola.

FDI is defined as long-term investment made by entities outside the borders of the host country (UNCTAD, 2005). The aim of these investments is to gain a long-standing interest in a sector with good prospects for growth. To qualify as FDI, the investor must acquire at least ten per cent of the company’s voting stock (UNCTAD,

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2005). Alternatively, a new business can be established or an existing business can be acquired as a whole by the foreign investors (UNCTAD, 2005). There is, therefore, a clear distinction between FDI and portfolio investment as portfolio investment entails limited control of the company. It is generally shorter in term and therefore more volatile (Goldstein and Razin, 2006: 32-33).

Within FDI, two main categories of investment can be distinguished, namely, Greenfield investment and Brownfield investment (Paull, 2008: 9-15). Greenfield investment is the direct investment through funding of new facilities in the host country. This type of investment is optimal for the host country as it provides linkages to the global market place, the transfer of knowledge and technology as well as contributing to job creation (Qiu and Wang, 2011: 836-838). Brownfield investment consists of mergers and acquisitions. Ownership of existing assets owned by local firms is transferred to foreign companies (Paull, 2008: 9-15). This form of investment does not necessarily lend itself to long-term benefits in the local economy unlike Greenfield investment (Estrinet and Meyer, 2011: 3-5).

FDI is seen as a positive attribute for any economy but it is especially beneficial to African countries (Lumibla, 2005). Most African countries have a low savings rate that is insufficient to fund local investment (Kirk and Celemens, 1999). FDI has the potential to have a positive effect on a number of economic factors within the host country. These positive effects include higher foreign currency reserves, growth in the countries’ gross domestic production (GDP) and job creation in the sector where investment has been made. All of the aforementioned influences can ultimately lead to higher living standards of the general population (Lumibla, 2005; Levitt, 2011).

Multi-national companies (MNCs) or multi-national oil companies (MNOCs) are the main sources of FDI to developing countries and this creates a number of other benefits. These benefits include new technology being obtained, easier access into world markets, training of the workforce and new skills they obtain, as well as new ideas and procedures (Kehl, 2009: 1-11). In comparison to other companies, MNCs are more beneficial as these companies have the means for greater expenditure in research and development (Kehl, 2009: 1-11). These benefits can improve the

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shortcomings of the African labour and commodities markets. The commodities market is supplemented by higher investment and the labour market by a rise in technical knowledge (Perkins, Radelet and Lindauer, 2006:418 - p426). However, there are costs associated with FDI. These costs include the crowding out of local firms, higher strain on infrastructure, the fiscal burden on authorities in the host country and the increased dependency of the economy in the investing country (OECD, 2002).

It must be noted that investors have different motivations for investing abroad. The main motivations include market seeking, efficiency seeking and resource seeking (Kudina and Jakubiak, 2008). Market seeking entails that companies invest in companies within countries with strong demand whereas efficiency seeking motivates investors to invest in companies in certain countries because they can produce goods more cost effectively than in others (Kudina and Jakubiak, 2008). Finally, resource-seeking FDI is investment in a country that is richly endowed in natural resources to realise financial gain from the extraction of these resources (Makino, Lau and Yeh, 2002: 403-421). Even though Africa is a fast growing region, the region does not possess a particularly enriched market as the per capita income is relatively low and the lack of technical knowledge makes the region less efficient than developing countries in other regions. Therefore, the main motivation for investing in Africa is often resource seeking, as Africa is richly endowed with natural resources (Makino and Lau andYeh, 2002: 403-421; Southall and Melber, 2010: 171-173; Kudina and Jakubiak, 2008).

1.1.1. The oil sector

Oil sector investment can take place in two divisions of the sector, that is, the upstream and the downstream divisions. Upstream investment entails the funding of exploration and production activities in the oil industry while downstream investment entails funding of, amongst others, refinery and marketing activities (Fauli-Oller, Sandoris and Santamaria, 2011: 884-898). This dissertation is focused on the upstream sector.

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A country’s oil endowment is measured through reserves in the country. Proven oil reserves are the estimated quantities of oil that can, with reasonable certainty, be extracted for commercial use under clear economic conditions, operating measures and government regulation (National Centre for Economic Management and Administration (NCEMA), 2003). In addition to proven reserves, oil reserves may also be measured in terms of probable and possible reserves (BP, 2011). Probable reserves indicating estimated oil reserves that have a 50 percent or higher chance of being technically and economically extractable and possible reserves are estimated reserves that can prove to be significant but have a lower than 50 percent chance of being technically and economically extractable (Society of Petroleum Engineers (SPE) and The World Petroleum Congress (WPC), 2004). Both probable and potential reserves may become proven reserves with further exploration (BP, 2011; SPE and WPC 1997).The level of proven, probable and possible reserves is the most important factor for attracting oil sector FDI (UNCTAD, 2009).

Upstream exploration is conducted by many different types of companies. These companies include small independent oil companies, national oil companies (NOCs) and fully integrated oil companies (Petro Strategies, 2011). Firstly, small independent oil companies focus on exploration. By utilising all their resources in the field of exploration these companies are able to compete with larger integrated oil companies (Petro Strategies, 2011; Akello, 2010). Secondly, integrated oil companies are well known companies like Chevron and Shell as they usually supply oil to consumers worldwide. These companies are multi-national and are listed on the stock exchange. Their investment in African countries is much larger than that of small independent companies (Petro Strategies, 2011; Kingdom Zephyr, 2011). Thirdly, national oil companies are state owned oil entities that usually exist in oil rich countries. Examples of these companies include Sanangol in Angola and the Nigerian National Petroleum Corporation (NNPC) in Nigeria. These companies are amongst the largest in the world but, unlike integrated oil companies, their objectives are related to the economic wellbeing of the country rather than to an increase in equity or shareholder value (Pirog, 2007). Nigeria and Angola are both part of the Organisation of Petroleum Exporting Countries (OPEC), which is an intergovernmental organisation with 12 member countries. The function of OPEC is

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to unify and coordinate the policies of developing oil-exporting countries (OPEC, 2011). OPEC’s objective is to safeguard its members by stabilising oil prices and assuring members of a steady, sustainable income through their oil sector. In attempts to stabilise oil prices, OPEC formulates quotas for production for each member country to counter over production or unfair competition (OPEC, 2011).

There are currently 19 African countries identified as significant producers of oil. Most of these countries have shown strong economic growth partially because of foreign direct investment in their oil sectors (Ernst and Young, 2011). According to estimates, there is in excess of 7.3 trillion US dollars’ worth of oil in Eastern Africa alone (Levitt, 2011). FDI inflows to the oil rich African countries have continued to grow over recent years and other countries, including countries in Southern Africa, have discovered oil fields within their borders (Ernst and Young, 2011). The rapid growth of the economies of Asian countries is one of the more prominent reasons for the higher investment in the African oil industry. In particular, the growth in China triggered strong demand for African oil and China is now one of the biggest contributors to the higher FDI received by the African oil sector. Chinese interest in the African oil industry showed an increase during the 1990’s with Africa contributing 20 percent of their oil imports in 1999. This continued to rise to 31 percent in 2005 as Africa now plays a large role in China’s new growth strategy (Zhao, 2007: 399-415). Chinese oil imports from Africa remained nearly unchanged at 30 percent of their total oil imports but this percentage is expected to change in the near future as Reuters (2013) forecasts that Chinese oil demand will increase from 2.5 million bpd in 2005 to 9.2 million bpd in 2020 (CFR , 2012). However, China is not the only country interested in African oil. Because of the recent rise in oil prices, the developed world has also shown interest in African oil (Ernst and Young, 2011; Harding, 2012; UNCTAD, 2011).

The level of investment is, however, still highly dependent on the attitude of the host governments towards foreign investors (UNCTAD, 2008). For example, FDI inflows in the Nigerian oil industry dropped during 2011 because of their proposed Petroleum Industry Bill (PIB). The Bill was introduced in 2008 with the objectives of the vesting of petroleum, better allocation of land, better management of petroleum

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resources, higher participation by the government, better transparency and governance and lowering the level of environmental damage associated with the industry (Oil and Gas sector reform Implementation Committee (OGIC), 2009). The Bill has not yet been passed but is regarded as less favourable to transnational companies as the government seeks to regulate the oil sector more closely by introducing stricter criteria for the licensing rights of oil exploration in Nigeria (UNCTAD, 2011). In contrast, less regulated countries such as Ghana attracted higher FDI levels and have therefore thrived (UNCTAD, 2011). African governments have for some time now worked on removing unnecessary regulations and restrictions, controlling corruption and improving the ease of doing business. By changing policies, these governments attempt to improve the investment climate to attract more FDI (UNCTAD, 2008; UNCTAD, 2011; ADB, 2009).

There are contrasting views on the impact of abundant resources, and more specifically, the oil abundance in Africa. This is widely known as the “resource curse” (Clarke, 2010). The resource curse entails that the resource abundance of developing countries has a negative effect in the forms of political instability, more corruption, a hostile environment and a decline in growth in other sectors of the economy. In many African countries, including Nigeria and Angola, this seemed to be the case as these countries have been severely influenced by civil war and terrorism (Southall and Melber, 2009: 171-173). Mismanagement of foreign funds and outdated policies are viewed as the main cause of the negative impact of abundant natural resources in developing countries (Ernst and Young. 2011). These causes lead to a small percentage of the population realising financial gain while the rest remain in severe poverty. Therefore, it is important for these countries to implement the necessary economic reform and support structures to realise sustainable economic growth and development (Clarke, 2010; Southall and Melber, 2009: 171-173; Ernst and Young. 2011). However, the management of oil revenue and the so-called oil curse falls outside the scope of this dissertation.

A review of the literature suggests that oil in Africa may in the future create sustainable economic growth and development. Table 1.1 summarises the literature on growth and oil sector FDI in Africa.

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Table 1.1: Review of studies on African oil

Author Type of analyses Findings or Comments

Moses (2011) Regression model with GDP growth as dependant variable and oil- and non-oil FDI as independent variables.

Even though FDI to the oil sector is relatively less influencial to growth than FDI to other sectors, it can play a major role once the sector is restructured. Udosen, Etok and George (2009) Descriptive statistical analysis.

Nigeria can achieve sustainable growth through improved management of oil funds.

Ding and Field (2005) Three-equation recursive model by using a one-equation model to explain growth.

Distinguishes between resource dependence and resource endowment. The authors estimated two equation models and the findings were that resource endowment has a positive effect if the economy is not solely dependent on resource extraction.

Frynas and Paulo (2007)

Qualitative analysis Even though oil exploration has proved to have a negative effect on African countries in the past, the new rise in interest in the African oil sector does not necessarily have to follow the past trends. African countries can restructure their policies and thereby reap the benefits of the foreign exchange inflows.

From Table 1.1, it can be seen that African oil producing countries can reap large benefits from oil production if the policies in the oil sector are restructured, the revenues are better managed and if the countries diversify their domestic production in order to be less dependent on the oil sector.

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1.1.1.1. Nigeria

Nigeria is one of the most prosperous countries in sub-Saharan Africa and, even though they have had problems with terrorism, corruption and violent uprisings in the north of the country, it is still currently considered a low-to-moderate risk country for foreign investment (NKC, 2011). Nigeria is currently rated as a lower middle income country with a GDP of approximately 193 billion US$, the majority of which is earned by the oil sector (World Bank, 2010).

The search for oil in Nigeria started in the early 1900s but had little success until the 1950s when Shell first exported oil from Nigeria (Obasi, 2003). Since then the industry has experienced steady growth and a resulting increase in FDI inflows. Nigeria joined OPEC in 1971 and thereafter the Nigerian oil sector experienced two major booms of FDI inflows. The first was in 1986 when Nigeria adopted the Structural Adjustment Programme (SAP) that entailed, amongst other things, that the fiscal policy was more stable, that the currency value was more realistic and tariff levels were revised. The second can be attributed to the Nigerian Investment Promotion Commission (NIPC) decree in 1995, which eradicated all restrictions on foreign shareholding in the country (Moses, 2011: 333-343; NCEMA, 2003).

Currently, Nigeria is estimated as the African country with the second largest untapped oil reserves. Even so, Nigeria only produces at 30 percent capacity (Levitt, 2011). In an attempt to improve transparency and control of the Nigerian oil sector, the PIB was proposed and is in the process of being implemented. Even though the bill has not yet been passed, the fact that the government would like to more closely regulate the oil sector has discouraged many foreign investors. This led to a downturn in total FDI inflows to Nigeria as the oil industry contributes some 60 percent of the Nigerian FDI inflows (Levitt, 2011; UNCTAD, 2011).

1.1.1.2. Angola

The 27 year Angolan civil war characterised the country as being politically unstable. The war ended in 2002 but even before the end of the war, the country’s economic state was improved by foreign interest in their offshore oil reserves (Food and Agriculture Organisation (FAO), 2011). Even though the country is now seen as being relatively politically stable, the war severely damaged the infrastructure and

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reconstruction is still under way (USAID, 2011). Angola is currently rated as a lower middle-income country with a GDP of approximately 75 billion USD, the majority of which is earned by the oil sector (FAO, 2011).

Oil production in Angola started in the 1950’s and, ever since, the country has become more dependent on the oil industry (OPEC, 2011). In 1998, Angola experienced an upwards spike which boosted their FDI inflows from under 200 million US$ to over 1.4 billion US$. This increase was due to large offshore oil exploration that attracted various foreign investors and in 2007, Angola joined the OPEC group (OPEC, 2011). From that time, the FDI inflows have shown a strong increase with the exception of periods of downturn due to perceptions of political instability (FAO, 2011).

Angola is currently one of the region’s largest FDI recipients and the majority of FDI inflows are attributed to the oil sector. The Angolan oil sector became the largest oil exporter to China in 2005, contributing more than 50 percent of China’s oil imports (Zhao, 2007: 399-415). One significant problem currently faced by Angola is that their oil output exceeds their OPEC quota (UNCTAD, 2011).

1.2. Problem statement

A problem faced by Africa is the lack of local investment because of the low savings rate. To explore and develop Africa’s oil resources, investment funding and knowledge in the field is required. Africa lacks both of these assets. Nigeria and Angola are two of the largest oil producers in Africa. By attracting FDI to this sector, not only will the Nigerian and Angolan oil sectors gain the necessary funding for oil extraction but they will also gain knowledge from transnational corporations. Greater FDI is needed to fully exploit their available oil resources. Although many studies have been undertaken on the factors that attract FDI, few studies have focussed on oil sector specific FDI. Therefore, the aim of this dissertation is to determine and compare the factors that attract oil sector FDI in Angola and Nigeria.

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1.3. Motivation

Nigeria and Angola are both countries richly endowed with crude oil. The problem faced by the vast majority of the African continent however is to develop and extract these resources to better their poor development standing. To develop the upstream sector, investment funding and knowledge in the field is required. Africa lacks in both investment funding and technical knowledge. By attracting FDI to this sector, not only will the Nigerian and Angolan oil sectors gain the necessary funding for oil extraction but they will also gain knowledge from transnational corporations.

1.4. Objectives

The main objective of this dissertation is, primarily, to determine the external factors and internal factors that influence FDI inflows to the Nigerian and Angolan oil sector. Secondly, the dissertation will compare the main contributing factors to establish which of the factors play a significant role in attracting FDI to oil sector in these countries in order to identify similarities and differences.

1.4.1. Sub-objectives

The sub-objectives of this dissertation are to:

 Provide a literature review of FDI and the oil industry.

 Review the current trends, in FDI flows and in the oil sector from a global, an African and a country specific perspective.

 Analyse the literature and current trends in Nigeria and Angola in order to determine the factors that may have an influence on attracting oil sector FDI.

 Use FDI data and test the factors that may have a significant influence on attracting FDI inflows to the oil sectors of Nigeria and Angola.

 Compare the findings of both countries and draw conclusions from this comparison and thereafter, to make recommendations.

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1.5. Research method

This dissertation will undertake both a literature review and an empirical analysis.

The literature review will provide an overview of FDI theory, the motives for investment, the types and benefits thereof; an overview of the African and, more specifically, the Nigerian and Angolan oil industries and the influence that FDI inflows have had on these sectors. The current FDI inflow trends in Nigeria and Angola will be reviewed and oil sector FDI compared to the other FDI attracting industries. The dissertation will then examine and compare the current state of the Nigerian and Angolan oil industries.

The empirical analysis will consist of a country comparison through four least square regression models (domestic models for Nigeria and Angola and the global models for both countries) using data between 1990 and 2011 obtained from the World data Bank and the BP statistical review 2012. The data used will describe the traditional determinants of FDI inflows laid out in literature review and other determinants derived from past studies of FDI inflows in transitional economies and oil sector dependent countries. However, it must be noted that the lack of accurate and sufficient time series data for Nigeria and Angola constrains the analysis.

1.6. Outline of the dissertation

The remainder of this dissertation is structured as follows: Chapter two provides a literature review of FDI theory and oil sector theory. Chapter three provides an overview of current trends in FDI inflow trends and the oil sector in a global, African and country specific perspective, focusing on Nigeria and Angola. Chapter four then provides a theoretical framework and detailed description of the data used before presenting a domestic and global model for Nigeria and Angola and comparing the influencing factors in each country. Finally, Chapter five summarises the dissertation

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Chapter 2: Literature review of FDI and the oil sector

2.1. Introduction

Through a theoretical explanation of FDI and the oil sector, a better understanding can be reached of the necessity of FDI to developing countries in Africa and of the role that the African oil industry plays in obtaining higher level of FDI. Thereafter, the factors influencing the oil sector FDI can be investigated.

This chapter will consist of two sections, the first of which will discuss the literature on FDI (Section 2.2). This will include the difference between FDI and portfolio investment, different types of FDI, benefits and costs of FDI and the determinants of FDI. The second section will discuss oil industry theory (Section 2.3) which will include investment type, oil reserves, the different companies who invest in the industry and the contrasting views of the so-called oil curse.

2.2. FDI theory

As discussed in chapter one, FDI can be highly beneficial to African countries by supplementing their savings rates as well as having a positive influence on the industry in which the investment is made. Therefore, the theoretical foundations of FDI are explained in this section to facilitate a better understanding of the following chapter on the current trends in FDI.

2.2.1. FDI Definitions

FDI can be defined as:

“the objective of obtaining a lasting interest by a resident entity in one economy in an economy other than that of the investor. The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence on the management of the enterprise. Direct investment involves both the initial transaction between the two entities and all subsequent capital

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transactions between them and among other affiliated enterprises, both incorporated and unincorporated” (OECD, 1996).

The standard definition for FDI according to UNCTAD (2005) is:

“A long-term relationship involving a significant degree of influence on the management of the enterprise encompasses a heterogeneous group of corporate actors, some with complex integrated production structures, others with little more than a sales outlet in a single foreign market, a problem that is hardly resolved by reducing the control threshold to a minimum 10 per cent equity claim”.

According to the International Monetary Fund (IMF, 1993), FDI has three components:

1. equity investment,

2. reinvested earnings, and short-

3. and long-term inter-company loans between parent firms and foreign affiliates.

The main difference between FDI and other investments from abroad lie in the lasting interest and control by foreign investors through management of the host company.

Therefore, FDI and foreign Portfolio investment must not be confused. Portfolio investment entails the purchase of securities on the stock market (Rutherford, 1995: 1299-1324). Portfolio investors do not necessarily intend to influence the management or direction of the company, the investment is usually shorter in term and funds can more easily be divested (UNCTAD, 1998). In contrast, FDI investors have a much higher interest in the wellbeing of the company and therefore, the investors seek to influence the management to better productivity (Itay and Razin, 2005). Further, FDI investment is usually long-term and therefore more stable when considering the company’s growth prospects (Rutherford, 1995: 1299-1324; UNCTAD, 1998; Itay and Razin, 2005). FDI is also less susceptible to the effect of changing exchange rates than is portfolio investment because a lower valued

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currency can lead to lower cost of production, which will have a positive effect on direct investors (UNCTAD, 1999).

2.2.2. Categorising FDI

FDI can be categorised by its direction, the type of investment and the investors’ motivations. Firstly, the direction is dependent on whether FDI flows into the “home” economy from abroad or if investment flows outward from the “home” country to a foreign economy (IMF, 1993). Secondly, the investment type refers to whether investment is made by obtaining a share of an existing company in the host country or obtaining the existing company as a whole or investing to fund new facilities in the host country (Estrinet and Meyer, 2011: 3-5). Lastly, FDI can also be categorised by the reason for investors to choose a certain country to invest in. These reasons may include the procurement of a certain natural resource, the penetration of a growing market or better production efficiency in the foreign market than in the local market (Basu and Srinivasan, 2002; UNCTAD, 1998).

2.2.2.1. Categorising FDI according to the direction of flow

The direction can be distinguished by either inflows or outflows. FDI inflows are the investment capital received from investors abroad or non-resident investors into a certain host country (IMF, 1993). FDI outflows on the other hand are local investors or residents of the “home” country funding activities abroad (IMF, 1993).

2.2.2.2. Categorising FDI according to investment type

The type of investment can be divided into Greenfield or Brownfield investment (Nocke and Yeaple, 2006: 1-4) as previously stated. Greenfield investment is direct investment through the funding of new facilities in the host country. This type of investment is optimal for the host country as it provides linkages to the global market place, the transfer of knowledge and technology as well as job creation (Qiu and Wang, 2011: 836-838). Brownfield investment, on the other hand, consists of mergers and acquisitions. Ownership of existing assets owned by local firms is transferred to foreign companies (Paull, 2008: 9-15). This form of investment does

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not necessarily lend itself to long-term benefits to the local economy, as does Greenfield investment (Estrinet and Meyer, 2011: 3-5).

2.2.2.3. Categorising FDI according to investors’ motivations

Investors seek certain benefits that the host country possesses that encourage the investor to invest in the country. These motivations include natural resource seeking, efficiency seeking and market seeking investment (Basu and Srinivasan, 2002; UNCTAD, 1998). Natural resource seeking investment entails the search for specific resources of which the host country is endowed with. Included in this classification is investment from abroad in exploration of oil, gold and coal in African countries. Secondly, market-seeking investment entails that investors would invest in the host country because of the sheer size of the local market and the economic growth in the host country. Lastly, efficiency seeking investment entails that investors are driven to invest in the host country to reap the benefits of special features that the host country possesses. These features may include low cost labour, a highly skilled work force or technological and infrastructural superiority (Basu and Srinivasan, 2002; UNCTAD, 1998).

2.2.3. Benefits of FDI

The benefits of FDI can be divided into direct and indirect effects of FDI. Direct effects include supplementing local savings to achieve greater production within the host country while indirect effects include several effects that better growth and development in a country through the interest of foreign investors and the presence of foreign firms (Lumblila, 2005).

2.2.3.1. Direct positive effects of FDI

The positive correlation between FDI and economic growth has been proven by a number of empirical studies including studies by Braunstein and Epstein (2000) and by Gallagher and Zarsky (2003: 19-44). Higher availability of capital in the host country leads to higher production and therefore to an increase in GDP growth (Dabla-Norris, Honda, Lahreche, Verdier, 2010: 4-17).

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In developing countries, this is all the more evident as their low domestic savings rate is the reason for lower domestic investment (Kirk and Celemens, 1999). Through increased FDI inflows, the gap between the domestic savings rate and the desired investment level can be filled. This can cause FDI to have a larger effect on economic growth in developing countries than in developed countries (Dabla-Norris, et al, 2010: 4-17).

2.2.3.2. Indirect positive effects of FDI

Most indirect effects of FDI arise from multi-national corporations (MNCs) who invest in the host country. MNCs are usually large businesses that operate in a number of countries. The expansion of these companies into countries abroad is usually a result of strong growth in the company due to their superiority in technological advances and better productivity when compared to other and smaller companies (Aggarwal, Berrill, Hutson and Kearney, 2010: 557-577).

The first positive externality brought about by MNCs is the transfer of technology. This can be attributed to research and development, as MNCs are known for their expenditure in these areas. The transfer of technology arises as other businesses observe the MNC and adopt some of their processes and, thereby, become more efficient (Keller, 2009: 1-5, 59-61). Secondly, it is the probability of knowledge transfers from MNCs. This entails the transfer of knowledge from one employee to another or skills obtained through in house training by the MNC. These skills and knowledge obtained from the MNC can be transferred by the employee leaving the MNC and thereafter applying the newfound knowledge and skills in another local company (Keller, 2009: 1-5, 59-61). Thirdly, the employment level in the country is increased as jobs are created through expansion of the companies within which investment takes place. Some studies, however, found employment not to be proportional to the amount of FDI being invested. The findings were that FDI does increase per capita income that promoted economic development (Waldkirch, Nunnenkamp and Bremont, 2009). Finally, companies investing in a country or region will ensure that infrastructure is in place for their operations and this will in turn motivate the government concerning infrastructure development (ECOSOC, 2000; UNCTAD, 1999).

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There are several other positive indirect influences of FDI. Three of these influences include the promotion of international safety standards, better resource allocation and stronger financial markets (Lumblila, 2005).

2.2.4. Costs of FDI

The majority of studies find that the effects of FDI on the economy are positive (Blomstrom, Kokko and Zejan, 2000: 7-9; Sjohlomn, 1999). However, there are contrasting views on the effects of FDI in developing countries. There are costs of FDI to the host country including the cost of FDI to the host country through the crowding out effect (Aitken and Harrison, 1999: 605-617) and constraints of absorbing the positive effects of FDI (Alfaro Chanda, Kalemli-Ozcan and Sayek 2009: 242-256), as well as over dependency on FDI (Adams, 2009: 939-949; Rhagavan, 2000).

The crowding out effect is also known as the market stealing effect (Aitken and Harrison, 1999: 605-617). It entails that the domestic demand in the host country moves away from domestic firms to multi-national firms, and that the domestic firms suffer more because the lower demand outweighs the positive effects from spillovers from the multi-national firms. As there may be large gap in technology when comparing domestic firms to foreign firms in developing countries, the possibility of the crowding out effect is larger than in developed countries. Therefore, policies in the host country should be formulated to best suit the host economy as excessive FDI inflows may not be in the host country’s best interest (Meyer, 2004: 259-277; Blomstrom, et al. 2000: 7-9).

Constraints in developing countries may include technological constraints, infrastructural constraints, educational and healthcare constraints, corruption and political instability (Alfaro Chanda, Kalemli-Ozcan and Sayek 2009: 242-256). According to the World Bank (2011), the constraints are caused by a lack of linkages between the local firms, the local economy and the MNCs. Firstly, technological constraints occur when the host country does not have the capacity to absorb the spill-overs because of the technological gap between the host country and the

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national company (Alfaro, 2003: 13-16). Secondly, infrastructural constraints can be classified as telecommunications or physical infrastructural constraints. These constraints cause barriers in absorbing the FDI and therefore the effects of the FDI might be less than desired (Alfaro, 2003: 13-16). Thirdly, a lack of education and health care in developing countries play a large role in the deterioration of the workforces’ productivity as less money is spent on education because of high mortality rates. This is also why several African countries have a less productive workforce and, with the high number of AIDS victims in this region, knowledge in the workforce is lost (Simtowe and Kinkingninhoun-Medagbe, 2011: 2118-2131). Fourthly, corruption is a cause of lower beneficial influences of FDI being absorbed as the money being invested only makes the rich and powerful richer and more powerful. It also leads to lower trust by investors and therefore lowers the country’s FDI inflow as a whole (Kenisarin and Andrews-Speed, 2008: 301-316). Finally, political instability is another constraint in obtaining and absorbing FDI as investors observe countries with political instability as having higher risk for their investments where government spending may be not be contributing to economic growth (Neuhaus, 2006).

However, these constraints are not necessarily negative effects of FDI but are rather a motivation for improvement in developing countries. An increase in FDI is usually found to have a positive effect on the economy and the general standard of living in the population even if these effects are not proportionate to the amount of FDI inflows (Alfaro Chanda, Kalemli-Ozcan and Sayek 2009: 242-256).

Further, high dependence on FDI is also seen as a negative effect on growth and development as it may cause monopolisation as only one or a few companies with the means obtained through FDI can deliver the product or service with no competition in the market. These companies can therefore dominate pricing in their sector (Rhagavan, 2000). This in turn can negatively influence productivity, income distribution and employment (Ajayi, 2006; Rhagavan, 2000). High dependence also implies that the host country is subject to the performance of the investing countries and investing companies (Adams, 2009: 939-949).

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2.2.5. Determinants of FDI

FDI inflows are an important element for economic growth in developing countries, as these countries need to supplement local investment to achieve optimal investment levels (Kirk and Celemens, 1999). Further, the local economy can benefit through indirect effects of FDI (Keller, 2009: 1-5, 59-61). To increase the levels of FDI inflows, it is important to understand those factors that play a significant role in attracting FDI inflows. These factors can be divided into macro and micro determinants as explained below.

2.2.5.1. Macro determinants of FDI

Macro-economic determinates exist throughout the whole economy of the host country and they include political risk, exchange rates, inflation rates, openness of the market, domestic investment, value of exports and the budgetary deficit (Naude and Krugell, 2003: 2-12).

Political risk includes social instability, internal and external conflicts and expropriation within the host country (Musonera, 2008). It can influence a company through production disruption, damage to property and even the confiscation of goods (Lucas, 1993: 391-406). Political risk may be brought about by change in government rule and the nature of the new government, the mind-set of the opposing parties, the possibility of labour disruptions, the possibility of domestic terrorism, corruption and the competence of the legal system (Naude and Krugell, 2003: 2-12). Investors may be expected to invest in a country with sound political stability rather than in a politically unstable country.

The influence of exchange rates varies between countries (Blonigen, 2005: 4-18). It can be argued that a devaluation of the host countries currency leads to lower production cost relative to the country of the investor that can give the company in the host country an internationally competitive advantage if the business is export orientated. If the business relies heavily on imports, the opposite may be true as the production cost relative to other countries may in fact increase (Naude and Krugell, 2003: 2-12). The opposite can also be argued through the returns of investment

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being larger as the host countries currency appreciates (Froot and Stein, 1991: 1215-1216). The motivation for investment plays a large role in the desired exchange rate as market seeking investors would prefer a higher valued currency in the host country whereas efficiency seeking and resource seeking investors would most probably prefer a higher currency value in the host country (Blonigen, 2005: 4-18). Volatile fluctuation in the currency is however expected to decrease FDI inflows to the host country as it raises doubt concerning the economic stability of the host country (Urata and Kawai, 2000: 79-103).

It can be argued that a higher inflation rate leads to higher returns on investment as the higher price in the host country relative to the country of the investor may lead to greater profitability (Botric and Skuflic, 2005: 2-7, 14-20). A contrasting argument holds, however, that inflation is an indicator of economic stability in the host country and therefore higher or volatile inflation rates have a negative effect on the perception of investors that subsequently entails lower FDI inflows (Demirhan and Masca, 2008: 357-363; Urata and Kawai, 2000: 79-103).

Similar to exchange rates, the effect of trade and investment openness is linked to the motivation for investment. Openness in terms of trade leads to lower FDI through market seeking investors as exporting goods to the host country may be more cost efficient. Greater openness of trade may, however, increase FDI inflows to the host country by efficiency seeking and resource-seeking investors as these investors would like to export goods from the host country (Seim, 2009: 11-70). In general and especially in developing countries, however, FDI will increase with more relaxed investment and trade policies. The more restrictive the policies, the lower the FDI inflows will be (Onyeiwu and Sherestha, 2004: 98-105).

Domestic savings contribute to the current growth and development in a country and indicate whether there is sufficient infrastructure. In resource rich countries, however, domestic savings is believed to have a less significant influence on FDI inflows (Ndikumana and Verick, 2008: 2-5, 26-27). Domestic savings is strongly correlated with the openness of the host country. The openness of the host country does, however, not necessarily entail that the host country has a high quantitative value of

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exports (Singh and Jun, 1995). Yousaf, Hussain and Ahmad (2008: 35-56) found that export growth has a negative effect on FDI in the short term but a positive effect in the long-term. This may be because the company is not restricted to their local market and can display larger margins of growth and therefore higher revenue (Naude and Krugell, 2003: 2-12).

A government budget deficit usually leads to an increase in taxation. Therefore, it can have a direct influence on the company being invested in by the foreign investors (Azam, Khan, Hunjra, Ahmad and Chani, 2010: 4306-4313). This means that a large budgetary deficit can lead to tax uncertainty and the resulting lower FDI inflows (Naude and Krugell, 2003: 2-12).

2.2.5.2. Micro determinants of FDI

Micro-economic determinants exist on an industry level that directly influences the profitability and cost of FDI. These include growth within the market, the market size, the cost of labour, the policies of the host countries government and trade barriers (Naude and Krugell, 2003: 2-12).

Growth within the market is particularly imperative to market seeking investors as the growth of the market indicates potential growth for the company that is being invested in and therefore growth of investment and revenue for the investor (Botric and Skuflic, 2005: 2-7, 14-20). This determinant is not as significant to resource or efficiency seeking investors as their interest lies with factors other than that concerning the local market, including cost, skill level and productivity of labour and the cost and accessibility of resources.

There is a vast literature on market size as a determinant of FDI. The conclusion of the majority of the studies shows that a country with a larger population is likely to receive higher FDI as this indicates larger local demand for the host company (Resmini, 2000: 65-89; Bevan and Eastrin, 2000: 7-9). Similar to growth in the domestic market, however, market size is more significant to market seeking investors and does not pertain to resource seeking and efficiency seeking investors to the same degree (Botric and Skuflic, 2005: 2-7, 14-20).

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Lower labour cost in the host country relative to the investors’ country can attract higher levels of FDI as this may lead to lower production costs. This especially pertains to efficiency seeking FDI but can also have an influence on both market seeking and resource seeking investment (Nunes, Oscategui and Peschiera, 2006: 2-11)

Policies of the host country’s government will influence the decision to invest in a foreign country, as investors will expect certain advantages from investing in the location. The policies and structures put in place by the host government lay the foundations for the investment climate in the country. These foundations include the quality of infrastructure, the quality of public services and the skills level of the general population (Te Velde, 2001). International companies tend to invest in countries with more stable economic policies that are investment friendly as government policies may influence the operations of the company that is invested in (Musonera, 2008). The host government also initiates and enforces laws that may influence the investor’s decisions. These laws include tax laws, liability laws, trade restrictions and property rights (Musonera, 2008). According to Morgan (1998), the more liberal the laws are, the more likely FDI inflows are to increase and the management within such an investment climate will be more efficient and likely to lead to improved spill over’s into the host economy.

Trade barriers can take the form of tariff or non-tariff barriers (Fliess and Busquets, 2006: 5-8). Tariffs include import and export taxes as well as any duties paid to the governing body to transport goods across a countries border. Non-trade barriers include a number of elements that hinder trade between countries. Amongst others, these barriers include import and export tariffs and quotas, customs administration and technical, health and safety restrictions (Fliess and Busquets, 2006: 5-8). The impacts of trade barriers are uncertain as FDI inflows may increase because of higher trade barriers as FDI may be the only way that companies can cost effectively enter the market. On the other hand, companies that would like to export or have to import goods for production reasons may be reluctant to invest in a country with high trade barriers and this may deter FDI inflows (Lim, 2001: 4-9, 10-12).

A comparative assessment of the factors that attract oil sector FDI in Nigeria and Angola