MANAGEMENT OF THE NIGERIA CONTENT POLICY WITHIN THE
FABRICATION INDUSTRIES IN NIGERIA
BY
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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Local content policies are usually designed by policymakers to pursue targets such as industrial
development, job creation, value addition, linkage creation and better value chain
incorporation.
Governments have been using local content requirements for quite some time, and despite the
highly controversial debate in the literature about their success or failure, their popularity has
increased since the economic crisis of 2008.
The National Assembly of the Federal Republic of Nigeria enacted into law the Nigeria Content
Policy, “PART I-NIGERIAN CONTENT DEVELOPMENT IN OIL AND GAS
INDUSTRY”. The policy stated categorically that notwithstanding anything to the contrary
contained in the Petroleum Act or in any other enactment or law, the provisions of this Act
shall apply to all matters pertaining to Nigerian content in respect of all operations or
transactions carried out in or connected with the Nigerian oil and gas industry.
The article 41 – (1) of the policy required full engagement and steady growth of indigenous
companies engaged in the following operations:
a. Exploration
b. Seismic data processing
c. Reservoir studies
d. Engineering design
e. Manufacturing and Fabrication of Oilfield equipment
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f. Other facilities as well as the provisions of other support services for the Nigeria oil
and gas industry.
The dominant perspective on the regulatory role of Local content policy is that the
policy is a mechanism through which the benefits of a country's endowed resources on
economic development could be increased and also for trickling the wealth generated
to the country's people. The adoption of Local Content policy in the oil and gas
industry as well as manufacturing industries (fabrication) is also seen as a strategy to
increase the participation of indigenous oil firms in the supply chain of the sector, to
improve backward linkage development (a means by which procurement of locally
produced inputs and services is increased), and to create more employment
opportunities for the local workforce. Local value creation is considered to be a more
important contribution of the extractive sector than its direct contribution to economic
growth. For instance, countries such as Norway, Venezuela, and Malaysia have greatly
benefited from their oil and gas wealth. These resources have been used to transform their
economies, particularly in terms of local firms’ increased participation, infrastructure
development, job creation and backward linkage development (Tordo et al., 2013).
A UNCTAD (2006: report) notes that the oil sector could generate jobs through
increased participation of local service firms. The report also emphasizes that such
effects can revamp the local economy. Low participation of local firms in the industry
is often attributed to the lack of capacity to compete and the inability to meet industry
requirements in services such as fabrication and construction (UNECA, 2013; Esteves
and Barclay, 2011; Levett and Chandler,2012).
The Fabrication industry is an integral part of the Nigeria oil and gas industry as it supports the
development of both green and brown oilfield. It has been playing important roles in the
country’s oil and gas sector towards economic growth and development. Through the help of
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the sector, the Nigeria oil and gas sector generates about 95% of the total export revenue and
80% of her total national income (Okafor et al, 2014). In addition, it expends about $8 billion
annually in servicing its operations (Okafor et al, 2014). Regrettably, a significant proportion
of this amount is paid to foreign contractors for services like fabrication, engineering and
procurement; resulting into capital flight and leaving very little for developing industrial base.
Consequently, the government introduced the local content (LC) policy in March 2010, aimed
at championing the course for higher indigenous participation in the sector and value addition
for the nation. One of the major reasons for the policy was to promote higher participation of
small to medium-sized firms within the industry.
The following are the major fabrication companies in Nigeria.
i.
Nigerdock Nigeria PLC
Lagos
ii.
Dormanlong Engineering
Lagos
iii.
Aveon Offshore Limited
Port Harcourt
iv.
Saipem Contracting Nigeria Limited
Port Harcourt
v.
Daewoo Engineering and Constriction Ltd
Port Harcourt
vi.
Cakasa Nigeria Company Limited
Lagos
vii.
AOS Orwell
Port Harcourt
viii.
OCO Industrial Services Limited
Port Harcourt
ix.
Bablink Resources Nigeria Limited
Warri
1.2 AIM AND OBJECTIVES OF STUDY
The aim of this project is to examine the performances of the Nigerian Local Content as it
applies to the manufacturing (fabrication) industry.
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The objectives of this study are:
1. To investigate how fabrication companies in Nigeria manage the Local Content policies
and their level of compliance.
2. To identify the challenges responsible for poor implementation of the Local Content
policies within the Fabrication Industries.
3. To examine how to increase backward linkages in terms of procurement and
utilization of locally produced input materials, creating more employment
opportunities for the locals.
1.3 STATEMENT OF THE PROBLEM
This study seeks to explore management of the Nigeria content policy within the fabrication
industries in Nigeria. While efforts have been made by the government of Nigeria to fully
implement the local content policy, it is unfortunate that the policy has not yet been successfully
implemented because of several challenges which are inconsistent policies and poor policy;
financial constraints due to difficulty accessing funds from commercial banks and financial
institutions and political economy constraints (complacency and lack of awareness at highest
policy levels).These are the gaps that this study seeks to fully ascertain to find out why it has
been extremely impossible for the government to attain its target of 70% local content
compliance.
1.4 SIGNIFICANCE OF STUDY
This study will serve as a guide to the stakeholders of the fabrication companies in the
manufacturing industry in Nigeria on the best Management practices of Local Content.
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This study is designed to address the above gaps by assessing the efficacy of Local Content
policy in the Nigerian fabrication industry, focusing on the relationship between the policy and
local firms’ participation towards job creation. It provides empirical evidence on the degree to
which Local Content policy creates local value in the fabrication industry in Nigeria, with
particular reference to indigenous oil firms’ participation, backward linkages and job creation.
1.5 SCOPE AND LIMITATIONS OF THE STUDY
The scope of this work is limited to the management of the Nigerian Local Content within the
fabrication industry.
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CHAPTER TWO
LITERATURE REVIEW
2.1 EARLY DEVELOPMENT
The Local Content policy is designed to build the capacity of indigenous firms and to provide
more opportunities for participation in business. The targets for Local Content policy in
increasing local content development were set progressively 45% local content in 2007, 70%
in 2010 (Ihua et al., 2011, Ariweriokuma, 2009), and more than 80% by 2020 (Bakare, 2011).
The policy is also expected to increase backward linkages in terms of procurement and
utilization of locally produced input materials, creating more employment opportunities for the
locals (Esteves et al., 2013; Ihua et al., 2011; UNCTAD, 2006; Ariweriokuma, 2009).
Backward linkages involve supply of input materials to the commodity sector that links the
sector to other sectors in the local economy. On the other hand, forward linkages are activities
that involve processing of the sector's output prior to export through, for example in the
fabrication industry, the development/manufacturing of platforms (Tordo et al., 2013).
By expanding entrepreneurial activities in the oil and gas sector, the government's annual
financing in the sector is projected to increase from US$8 billion to approximately US$20
billion (Ovadia, 2013:318;Ihua et al., 2011). In order for this investment to be retained within
local businesses, it is important to ensure active participation of local firms. Without affirmative
action policies such as Local Content policy, business opportunities would be captured
primarily by foreign firms.
The success of Local Content policy depends on the ability of the policy to achieve its targets.
However, the level of achievement of this policy with respect to value creation in Nigeria is
yet to be ascertained. There is also limited empirical research to justify the efficacy of the
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policy. For example, a study by Ihua et al. (2011) focuses on entrepreneurial implications of
Local Content policy using exploratory factor analysis. This study only identified loading
patterns of items in Local Content policy constructs and did not test the relationship between
Local Content policy and localentrepreneurial activities.
Odujinrin and Adefulu (2007) examined the NLC policy in the Nigeria oil and gas industry.
According to them, the early 2000s witnessed a more aggressive and focused approach to local
content led by three (3) major studies – National Committee Report; INTSOK Report and
Synchronized Report. This provides the foundation for the Nigerian Content Development Bill
which was later signed into law by President Goodluck Ebele Jonathan in 2010.
Neff (2005) argued that Nigeria can increase the quantity of local content if it builds its capacity
around certain candidate technologies. He contended that expanding local content, or creating
“value added”, means that companies with ownership and or infrastructure in Nigeria continue
manufacturing and service production in the country.
This can be achieved by either stimulating the development of indigenous companies or
encouraging foreign investments and participation to build industrial capacity in a viable and
sustainable manner.
According to him: Nigeria's main obstacles to development of local content are its thin
industrial base, the lack of adequate power, water and other infrastructure to support an
expanded manufacturing base, cumbersome bureaucratic obstacles to development of small
and medium sized enterprises, and underdeveloped capital markets. The challenge for the
government is to create the proper framework within its current economic, political and
industrial constraints (Neff, 2005).
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NNPC (2008) described Local content as a significant multiple value created or added in the
economy of Nigeria by utilizing the Nigerians material, as well as, human resources for the
purpose of providing goods and services to the oil industry.
Obuya (2005) defines it in two ways. Firstly, is building domestic capacity appropriate for
product and service delivery equivalent in that given industry, as well as, a privilege to develop
a sustainable culture of competencies far-above the expectations of customers through key
local management and personnel. His second definition is a deliberate actions and orientations.
Warner (2007) views the local content from a perspective of “community content”. He opined
two varied policies that when utilized could help in attaining higher local content where the
local industries are given preferences to the multi-national industries.
The local content policy based on Warner (2007) can be implemented through agreements amid
multinational corporations and host countries such as in tender appraisals, lower prequalifications, and lower tariffs on imported semi-finished goods that are unavailable in the
country, as well as, negotiated conditions. In addition, while preferences can be given to local
subcontractors in terms of price, availability, as well as, being able to meet both financial and
technical requirements (Ugwushi, 2010), the local suppliers can be supported with provision
of financial aids, such as short-term loans, credit guarantees, and venture capital; investing
heavily in physical infrastructures like utilities and building, as well as, contractors, payments
of subsidies with the aim of overcoming higher cost incurred; and enhancing reliability and
quality of the indigenous firms. The aforementioned, strategies when utilized can help the
government of Nigeria to expand the local content capacity.
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2.2 RECENT DEVELOPMENT
In the extant literature on the management of Nigerian local content development, far more
attention is given to forms of binding contractual or regulatory constructs that require
manufacturing organizations to use certain volume of locally sourced inputs(Kolstadand
Kinyondo,2017)than aconsideration of strategies and tactics that the fabrication companies
pursue in order to increase local contents of theirproducts and services. This dominant narrative
of the local content development may have been influenced bya view that without external
impetus, companies involved in the extraction of natural resources will not give due
considerationtolocalcontentrequirement(Ovadia,2014; White, 2017).
Ovadia observed that although local content development benefits manufacturing companies
and the private sector in the long term through lower procurement costs, government
intervention using local content policy is necessary because fabrication companies generally
lack self-motivation to take action due to initial higher costs associated with training and skills
development for nationals and local suppliers. There is however a need to also look at local
content requirement from the business and macroeconomics perspectives.
Kolstad and Kinyondo (2017) argued that the mandatory local content requirements have cost
implications, which in some cases outweigh the intended benefits. Similarly, Hansen (2020)
argued that local content requirements may negatively impact the financial viability of
manufacturing companies’ operations, disrupt their supply chains, and threaten their brands
reputation. The increased cost for the extractive multinational companies could translate to
increased price of outputs and reduced tax for the government (Hansen, 2020).
Ngoasong (2014) found that some manufacturing companies view local content as a business
strategy and opportunity to achieve operational efficiency and maximize shareholders’ value.
As noted by Ramdoo (2016), companies are beginning to change their attitudeto local content
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from the mind-set of risk management and minimum compliance with regulatory requirements
and now seek mutually beneficial business opportunities with the local communities and
suppliers in response to local content requirement policies. Such companies consider that a
good local content strategy, which involves the use of local labor and local sourcing of some
inputs, can significantly reduce direct operating cost and mitigate against non-technical risks
and concomitant costs (Ngoasong, 2014).The companies that excel in local content
development integrate local supply chain support in their procurement policies as cost
effectiveness measures, focus on core inputs where local suppliers have capability, and provide
support to assist them meet the standards and requirements (Ramdoo, 2016). Key success
factors are building of strong relationships with the local businesses, aligning common
interests, and working together with other companies in the industry to maximize economy of
scale from the local market (Ramdoo, 2016). Furthermore, the companies that excel in local
content development invest in community development activities to earn freedom to operate
and require their contractors to continuously improve the local content value of their services
through local sourcing of inputs (Ngoasong, 2014).
The review of literature indicated that local content development is a public policy that has
been established in Nigeria, just as it is in other resource rich developing countries in Africa
and other parts of the world. Nigerian markets have become increasingly globalized and
vulnerable to international sectors with evidence suggesting that systemic gaps, sustainability,
and short comings in the services sector being the main driver (Akanbi, 2015; Boamah, 2017;
Olomu et al., 2020). It is established that local content policy is important business strategy
consideration for business leaders in the Nigerian manufacturing industry.
Two factors are considered in developing our framework. First, based on existing studies, we
attempt to link LC policy effects to indigenous firms’ participation, backward linkages, and job
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creation to capture policy-entrepreneurial outcomes in a model. Second, we demonstrate the
direction of the relationships between these variables. Based on theory, we also include
infrastructure, as a contingent factor, in the model.
We postulate that entrepreneurial activities may be influenced by external factors. Such
external influence is often seen in the form of government intervention in an economic sector,
such as encouraging local entrepreneurship. This has been identified in previous studies (see
Abdulkabir et al., 2015; Radosevic and Yoruk, 2013; Dew et al., 2004; Reynolds et al., 2001;
Gnyawali and Fogel, 1994), where it was argued that there is a direct link between government
intervention policies and entrepreneurship development. This is alsoreferred to in the literature
as the “opportunity theory”.
Adewuyi and Oyejide (2012) studied the factors that determine backward linkages in the oil
and gas industry in Nigeria using logic regression and found that the linkages in the value chain
were created as a result of the impact of LC policy and investments in infrastructure. There are
also studies in this area that use a descriptive approach, e.g., Monday (2015), where the
relationship between LC policy and human development is analyzed. However, the method
employed lacks statistical evidence on the causal relationships between the variables.
Gbegi and Adebisi (2013) contend that the desire for an increased contribution to the local
economy and society, and a strategic intent to pursue local content go beyond philanthropy.
According to them, there are lots of challenges of managing local content policy in the
extractive industry, such as:
1. Lack of a stimulating government regulatory framework;
2. Deficient infrastructural facilities;
3. An improved educational infrastructure is needed;
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4. Lack of adequate finance, insufficient pertinent technical expertise and unhelpful
multinational company's attitude;
5. Corruption and mismanagement or opaque accountability
6. Unstable and even volatile political and economic environment in Nigeria
7. Lack of appropriate materials.
They noted that the factors listed above amongst others have been the major obstacles to the
proper implementation of the local content Act in Nigeria.
Ovadia (2013), in his study questioned the process or measurement of local content policy. He
argued that local content policy sets very specific targets in 280 separate oil and gas activities.
The targets are expressed as percentages in terms of overall spend, hours of labour, tonnage,
or other defined measures. He quoted Ernest Nwapa, who stated thus:
But the Nigerian Content measurement is an issue, when you call an IOC and ask them how
they are doing with the Nigerian Content, they will give you numbers like 70-85% and they
may be right because what they are measuring is the fact that out of a hundred million dollars
that they would have spent on their projects, they've given 85 million dollars to Nigerian
companies. So, considering the fact that a few years ago it used to be about 255% - everybody
is clapping for themselves – we are all saying that we are doing Nigerian Content. But if you
check, the real Nigerian content they do is not for us. How much of those 85 million dollars
that is given to Nigerian companies is spent in Nigeria? Then you will know that we still have
a long way to go (Ovadia, 2013).
Edemhanria (2010), provided detailed implications of the local content Act of the Nigerian
state when he noted that beyond the issue of creation, the law also has far reached implications
for technological advancement, long term cost effectiveness, post-amnesty programme in the
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Niger Delta and the improved impact of oil and gas industry on Nigeria's Gross Domestic
Product (GDP). He noted further that the law made provision for exclusive consideration of
Nigerian indigenous service companies which demonstrate ownership of equipment, Nigerian
personnel and capacity to execute jobs and as such, all regulatory authorities, operators,
contractors, sub-contractors, alliance partners and other entities involved in the project,
operation, activity or transaction in the industry shall consider Nigerian content as an important
element of their overall project development and management philosophy for project
execution.
Writing on the challenges facing the Nigerian local content in the oil and gas industry,
Omenikolo and Amadi (2010), notes that in spite of the huge financial investment made by the
Nigerian government in the oil and gas industry of the economy, it has not translated into a
significant benefit for Nigerians.
According to them: The local content (LC) in the oil and gas industry is still very low as over
60% of their major exploration, drilling, production, well intervention and service provision
remains primarily co-managed by multi-national oil companies. Only minor contract has been
awarded to local contractors. Several challenges, ranging from infrastructural development,
political stability, good investment climate, project financing, transparency, high educational
standards, legal policy, resource management, research and development, fiscal policy,
environmental policy are some of the factors impeding the target by the federal government to
achieve 70% in 2010 (Omenikolo and Amadi, 2010:6).
They noted further that lack of stimulating government regulatory framework; deficient
infrastructural facilities; lack of adequate finance, insufficient pertinent technical expertise and
unhelpful multi-national attitude, corruption and mismanagement of opaque accountability;
unstable and volatile political and economic environment and lack of appropriate material in
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Nigeria are some of the impediments to the proper implementation of the local content policy
and they should be properly address.
The local content which is an effort at the domiciliation of most of the operations of oil and gas
activities in Nigeria showed how abysmally low the level of participation of indigenous
personnel had been over the years in the oil industry. Akinyosoye (2009), captured these
concerns thus:
The official figures of 15% local content by the DPR in 2009, which though doubtful, shows
that the problem is a serious one when compared with other manufacturing countries with far
lower reserve base like Brazil (75%), Norway (40%), and Indonesia (20%) (Akinyosoye,
2009:159).He further noted that the NLC law seeks to measure the percentage of the money
retained in the domestic economy from the oil and gas operations in the country.
According to Ihua et al. (2011), government entrepreneurial policy is a set of deliberate actions
towards building domestic capacity relevant to quality service and product delivery that are
needed in an industry. We also consider that entrepreneurship is a function of government
policy, which in many instances is an antecedent for increasing employment. In the context of
Local Content policy, the expected outcomes of indigenous fabrication firms’ participation
(IFFP) are improved backward linkages (LINK) in terms of high procurement of locally
produced input materials and increased job creation (JOB) for the local workforce. This is a
systemic way of promoting economic development through increased domestic entrepreneurial
activities (Esteves et al., 2013; Tordo et al., 2011; Bakare, 2011; Ihua et al., 2011). It is also
assumed that there are positive relationships among the variables through which job creation
is affected.
In addition, infrastructure (INF) is viewed as a factor conditional for investments and an
important element that influences business activities in an economy (Adewuyi and Oyejide,
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2012; Morris et al., 2012; Heum et al., 2003). Morris et al. (2012) noted that infrastructure
facilities, such as power supply, water, transportation, communication, and internet services,
often facilitate entrepreneurship and are the contextual drivers of backward linkages
development.
Figure. 2: Theoretical framework of value addition of Local Content policy within frastructure
In the context of Local Content policy, the expected outcomes of indigenous fabrication firms’
participation (IFFP) are improved backward linkages (LINK) in terms of high procurement of
locally produced input materials and increased job creation (JOB) for the local workforce. This
is a systemic way of promoting economic development through increased domestic
entrepreneurial activities (Esteves et al., 2013; Tordo et al., 2011; Bakare, 2011; Ihua et al.,
2011). It is also assumed that there are positive relationships among the variables through
which job creation is affected.
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In addition, infrastructure (INF) is viewed as a factor conditional for investments and an
important element that influences business activities in an economy (Adewuyi and Oyejide,
2012; Morris et al., 2012; Heum et al., 2003). Morris et al. (2012) noted that infrastructure
facilities, such as power supply, water, transportation, communication, and internet services,
often facilitate entrepreneurship and are the contextual drivers of backward linkages
development.
Government policy is more likely to be successful in ensuring active participation of local firms
in businesses when it is complemented with adequate infrastructure (Ihua et al., 2011; Perkins
and Robbins, 2011). As a complementary factor, infrastructure is assumed to be positively and
directly associated with firms’ participation and backward linkages through which more job
opportunities could be created.
With this proposition, we link the framework and develop a simple conceptual model (Fig. 1)
to show the relationships between LC policy, infrastructure (INF), indigenous fabrication
firms’ participation (IFFP), backward linkages (LINK) and job creation (JOB).
2.3 KNOWLEDGE GAP
Based on the reviewed literatures, this study has identified that Nigerian banks cannot make
significant impacts on the local development as they lack proper financial base. Most Nigerian
banks that are considered big can only make little financial contribution. In most cases, they
take the risk of funding companies as the businesses themselves might not be promising since
they are usually not structured properly. More so, there is incapability to exert pull on funds
because of lack of appropriate collateral and encouraging corporate image.
Furthermore, the country’s capital market remains underdeveloped and the SMEs have also not
thrived, which are the backbone of most economics. This study has identified these gaps and
will be incorporated for future research.
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CHAPTER THREE
RESEARCH METHODOLOGY
3.1 STATISTICAL METHOD
Structural equation modelling (SEM) is applied to examine the causal relationships
between exogenous latent variables, i.e., LC policy and infrastructure, and endogenous
value creation latent variables, i.e., indigenous oil firms’ participation, backward linkages
and job creation. SEM is a multivariate statistical method that has been increasingly used
in Engineering for analysing causal relationships among latent variables and relationships
between latent and observed variables (Xiong et al., 2014; Jöreskog, 1977).
SEM analysis is carried out in two stages—the measurement model and structural model
analysis. Measurement model analysis tests the reliability of the observed items in
determining whether the items adequately measure the latent variables represented. The
model takes into account measurement errors, which reduces bias in the SEM model.
Structural model analysis tests relationships between latent exogenous and endogenous
constructs, as well as relationships among the latent endogenous constructs. More
importantly, SEM can easily detect multi-collinearity problems (Radosevic and Yoruk,
2013; Xiong et al., 2014; Folmer et al., 2010) and also allows modification within a
justifiable setting (Hair et al., 2014). Hence, SEM is suitable for analysing the type of data
used in our study.
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3.2 QUESTIONNAIRE DEVELOPMENT FOR DATA COLLECTION
The data for this study is be obtained through both Primary and secondary sources. The
primary sources will be further divided into qualitative (Individual interviews) and
quantitative (Questionnaire) pulled from multiple-case study.
The observed variables representing latent variables in the present study were extracted
from survey questionnaires of Oyejide and Adewuyi (2017). The observed variables
measuring LC policy and backward linkages were extracted from a questionnaire
developed to study oil sector linkages (Oyejide and Adewuyi, 2011). The items in the
questionnaire were originally derived from the policy variables listed in the Nigerian Oil
and Gas Industry Content Development Act, 2010. The survey questionnaire developed by
Hussmanns et al. (2018) was designed to gauge perceptions of job seekers on employment
opportunities. Hence, relevant items were extracted and revised to measure job creation in
the present study. Using the snowball approach, a pilot study was conducted on
ninefabrication/manufacturing firms to test our questionnaire, and based on their feedback;
some questions were reworded and improved before the actual survey was conducted.
3.2.1 SAMPLE SELECTION AND QUESTIONNAIRE ADMINISTRATION
Indigenous oil firms were chosen as respondents because they are the main target of the LC
policy and are considered to have a better understanding about the concept of LC on
business activities in the sector. Thus, they are considered qualified to address questions on
the effectiveness of LC policy, issues related to local input procurement and other policy
outcomes. Five out of nine fabrication firms, namely Dormalong Engineering, Babalink
Resources Nigeria Limited, Aveon Offshore, Niger Dock and Daewoo Nigeria Limited,
were selected because of their large-scale fabrication related business operations.
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Table 3: Sampling of the Indigenous Firms
S/N
1
2
3
4
5
TARGET
NON
SAMPLE
FIRMS
POPULATION SAMPLE
RESPONSE
RECEIVED
DORMALONG ENGINEERING
45
34
8
26
AVEON OFFSHORE
77
56
11
45
NIGER DOCK
65
48
9
39
BABALINK RESOURCES NIGERIA
LIMITED
52
37
6
31
DAEWOO NIGERIA LIMITED
108
85
9
76
TOTAL
347
260
43
217
3.2.2 SAMPLE SIZE FOR STRUCTURAL EQUATION MODEL
Sample size is important when statistical power of an analysis is considered in covariancebased methods, especially in SEM. Some experts propose a minimum sample of 10 cases per
item (Hair et al., 2011) or to use the ratio ofindicators to a latent variable in determining
the
minimum
sample(Marshetal.,1996,1998;Boomsma,1982).Theruleof
10
observations per indicator was found to be biased. However, a sample of 200 or
greater is considered to be adequate for SEM analysis(Kline,2011;Hoe,2008).
Recently, Westland(2012)proposed a calculation of minimum sample based on
three indicators: standard statistical power, effect size, and level of significance.
He provides an online statistical algorithm tool, developed by Daniel Soper, for
calculating the appropriate minimum sample size. Following the criteria, we
specified a small effect size of 0.15, a middle point of magnitude for small effect,
astatistical power of 0.8and 0.05 level of significance in setting the lower bound
for samples needed for this study. With 27 indicators and 5 latent variables, the
result suggests that a minimum sample size of 201 would be sufficient to achieve
a statistical power for precision in our analysis. Thus, a sample size of 209 used
for our analyses is deemed to be adequate.
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3.2.3 MEASURING VARIABLES
Local Content policy is measured by seven observed indicators derived from
Adewuyiand Oyejide(2012)that were initially used asLC policy thrusts provided in the
NOGICD Act 2010, some of which were also identified in some studies
(Esteves et al.,2013; Gnyawaliand Fogel, 1994). The observed indicators include
licensing regulation, firm registration, ownership control, labor market regulation, tax
policy, tariff policy and monitoring. We chose these indicators because they are
designed to regulate business activities and can be used to measure the performance
of the policy.
Infrastructure is measured by five observed indicators, including power supply, water
supply, transportation, telecommunication, and internet services. These indicators are
mainly drawn from existing studies and are argued to be important preconditions for
business success (Adewuyi and Oyejide, 2012; Tordo et al., 2011; Heum et al., 2003).
Indigenous fabrication firms’ participation is measured by five indicators drawn from
Adewuyi and Oyejide (2012), which include business opportunities, environment
conduciveness, technical skill, financial funds accessibility and non-financial incentives. The
factors are seen as drivers of entrepreneurship influencing business formation and
participation (Ihua et al., 2011, Gnyawali and Fogel, 1994).
Backward linkages relate to the cooperation between firms and their input suppliers.
This is perceived to stimulate procurement of locally produced input materials for
further production.
Thus, a discretional approach was used to choose the five most important indicators to measure
backward linkages. The indicators take the form of local input development, information
exchange, technical upgrading, negotiation of payment and delivery, and labor training.
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Measuring job creation is not a complex issue, but it is impractical to capture all of the
indicators that could possibly measure the construct. In a broad sense, job creation has been
referred to as the availability of paid employment positions to be filled by work-paid workers
in a firm (Baptista et al., 2008). Job creating ability of a firm depends on the firm size, the
length of period of establishment, or the level of participation in business activities. The
indicators designed to measure job creation include job availability, job placement, job
application, job requirements and job offers.
3.3 REFLECTIVE SEM MODEL AND HYPOTHESES
An SEM model represents the relationships between latent exogenous and latent endogenous
variables, as well as the relationships among latent endogenous variables. In this study, our
SEM model has five latent constructs: local content policy (LC policy), infrastructure (INF),
indigenous fabrication firms’ participation (IFFP), backward linkages (LINK), and job creation
(JOB), measured by means of reflective indicators.
This structural model is generally preferred to a formative model in related Engineering SEM
studies. In a reflective model, indicators are expected to have the same antecedents and
consequences because they all reflect the same underlying construct. Thus, a weak item can be
dropped without changing the meaning of the construct, and the remaining items would still be
consistent in what they intend to measure.
In matrix form, the SEM model is as follows:
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Saipem Classification - General Use
0
𝐼𝐹𝐹𝑃
[𝐿𝐼𝑁𝐾 ] = [𝛽2,1
𝐽𝑂𝐵
𝛽3,1
0
0
𝛽3,2
0
𝛾1,1
𝐼𝐹𝐹𝑃
0] 𝑋 [𝐿𝐼𝑁𝐾 ] + [𝛾2,1
𝐽𝑂𝐵
0
0
𝛾1,2
𝜉1
𝛾2,2 ] 𝑋 [𝐿𝐶_𝑃𝑂𝐿𝐼𝐶𝑌] + [𝜉2 ] … … … … … (3.1)
𝐼𝑁𝐹
0
𝜉3
Where 𝛽𝑖,𝑗 and 𝛾𝑖,𝑗 are parameters to be estimated. 𝛽𝑖,𝑗 represents an (m x m) matrix denoting
the effect of the 𝑗𝑡ℎ endogenous latent construct on the 𝑖𝑡ℎ endogenous latent construct, 𝛾𝑖,𝑗
represents an (m x n) matrix denoting the effect of the 𝑗𝑡ℎ exogenous latent construct on the
𝑖𝑡ℎ endogenous latent construct, and 𝜉𝑖 is the vector of disturbances.
Main Hypotheses: Seven hypotheses are proposed based on the conceptual model (Fig. 1),
which depicts the direct and positive relationships between the latent constructs. In summary,
we hypothesize that LC policy influences IFFP (𝐻1 ,𝛾1,1); LC policy influences LINK (𝐻2 ,
𝛾2,1); INF influences IFFP (𝐻3 ,𝛾1,2 );; INF influences LINK (𝐻4 ,𝛾2,2);; IOFP influences LINK
(𝐻5 , 𝛽2,1); IFFP influences JOB (𝐻6 , 𝛽3,1 ); and LINK influences JOB (𝐻7 , 𝛽3,2); directly and
positively.
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Saipem Classification - General Use
CHAPTER FOUR
RESULTS AND DISCUSSION
This chapter describes the characteristics of the sample firms and the results of our
measurement and structural models. We estimated the measurement and structural models. The
measurement model was used to confirm the reliability of the observed indicators and the
validity of the abstractive latent constructs. The structural model was estimated to test the
hypothesized causal relationships among the latent constructs.
4.1 CHARACTERISTICS OF SAMPLE FIRMS
Table 2 presents the characteristics of the firms used in our analysis in terms of registration
year, subsector activities and size of capital. Most of the firms (34.9%) are registered with the
Corporate Affairs Commission between the year 1991 to 2000, followed by 30.6% registered
from 2001 till date, and 25.4% registered between 1981 to 1990. Only 9.1% of the firms were
registered before 1980. The increase in registration of Nigerian firms was likely a result of the
country's oil boom in the 1970s, and a series of indigenization policies instituted by the
government in the oil industry during this period. More so, independent national companies set
up by experts who had worked and trained in some multinational oil companies resulted in an
increase in local firms in the 1990s. It is observed that a large number of firms (32.1%) provides
at least two operative services, followed by those engaged in exploration and production
(19.6%) and 15.8% are involved in other service activities. Remaining 8.1% of firms are
involved in design and engineering, 7.7% in fabrication and construction, 5.2% in drilling and
well completion, and 2.9% in ITC service.
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Saipem Classification - General Use
Tables 2: Characteristics of Sample (n=209)
S/N
Respondent'
s Information
1
Year of
Registration
2
3
Sub-sectoral
Activities
Firm Size
Frequenc
y
Groups
Percentage
(%)
Cumulativ
e
Percentage
(%)
Before 1980
1981–1990
1991–2000
From 2001 till date
19
53
73
64
9.1
25.4
34.9
30.6
9.1
34.5
69.4
100
Fabrication and
Construction
116
7.7
7.7
Drilling and Well
Completion
Control System and ITC
11
6
5.2
2.9
12.9
15.8
Design and Engineering
Services
Consultancy
17
10
8.1
4.8
23.9
28.7
Exploration and Production Goods and
Services Supply
Multiple services
Others
Not indicated
Less than 50
50-200
201–500
501-800
801-1000
Above 1000
Not indicated
41
67
33
8
22
46
31
12
9
58
31
19.6
32.1
15.8
3.8
10.5
22
14.8
5.7
4.4
27.8
14.8
48.3
80.4
96.2
100
10.5
32.5
47.3
53
57.4
85.2
100
Note: Firm size was measured by capital asset in local currency (₦) in million.
Over 50% of the firms in our sample are classified as large, followed by 22% mid-size firms
and 10.5% appeared as small firms. The distribution reflects that firms in this industry are
capital intensive and can survive the capital requirement of the fabrication industry. Large firms
are also more likely to have access to finance when needed.
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