European Journal of Social Sciences, Arts and Humanities Vol. 2, No. 2, 2014
THE IMPACT OF MULTINATIONAL OIL CORPORATION ON THE NIGERIAN
ECONOMY : AN EMPIRICAL ANALYSIS
Benedict N. Akanegbu, Ph.D.
Professor of Economics, Dept. of Economics
Faculty of Social Sciences
Nasarawa State University
Keffi, Nasarawa State, NIGERIA
CITATION: N.Akanegbu, B. (2014). The impact of multinational oil corporation on the
Nigerian economy. An empirical analysis. European Journal of Social Sciences, Arts and
Humanities, 2 (2), 22-31.
ABSTRACT
The growth and expansion of multinational oil corporations have generated a lot of concerns in the international communities, especially in the under-developed nations of the world such as Nigeria. The developed countries regard multinational oil corporations as agents of positive change; while the underdeveloped countries still regard them as agents of negative change through foreign direct investment (FDI). Economic theories have shown that foreign direct investment being one of the key macroeconomic variables has a positive relationship with economic growth. Therefore, this study specifically test the hypothesis on whether or not the multinational oil corporation foreign direct investments has positive and significant impact on output growth in the Nigeria economy using a model based on a modified neoclassical production function where FDI is taken as an input in the production process.
The results of the estimation analysis obtained demonstrated that there is a positive relationship between multinational oil corporation foreign direct investments and output growth in the Nigerian economy. This shows that the policies that will increase the
Multinational foreign direct investments in the Nigerian economy should be encouraged.
Keywords: Multinational Oil Corporations, Economic growth, Foreign Direct Investment,
Neoclassical Production Function, Private International Business.
INTRODUCTION
The origin of private international business enterprise in an original form dates back to the early fifteenth and sixteenth centuries when European business companies started moving to various parts of the globe. For example: the British East India Company (1599-1858). The
Hudson’s Bay Co. and the Royal African Co. were also created in the same way by British merchants with the objective of trading with America and Africa respectively. These were the predecessors of the modern multinational corporations (MNCs). Since World War II, the dimensions of multinational corporations have grown and spread with phenomenal speed.
The international petroleum industry, however, predates this more recent development.
There is a difference of opinion over the definition of a multinational, trans-national and international corporation. It has various names like direct investment, international business, international firm, international corporate group, the multinational family group, worldwide enterprise, global companies, ultra-national companies and so on. But essentially all Multi-
National Corporations (MNCs) keep their headquarters in one country and build factories, manufacture and sell their products simultaneously in different countries. As Vernon (1971) argues, a “multinational business enterprise” can be thought of as a cluster of corporations of
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European Journal of Social Sciences, Arts and Humanities Vol. 2, No. 2, 2014 different nationalities that are joined together by a parent company through bonds of common ownership that responds to a common strategy, and that draw on a common pool of financial and human resources. Fatemi and Williams (1975) define it as a company whose foreign sales have reached a ratio of 5% of total sales. Dunning (1996) also refer to MNCs as enterprises which have their home base but also establish or extend their business into another country and operate under the law of those countries. And others look to the distribution of ownership, the global products, and the mixed nationalities of management as the determining characteristics. According to a United Nations study, the term multinational corporation covers all enterprises which control assets in two or more countries, and earn at least one hundred million dollars in sales.
Nigeria is Africa’s most populated nation and the richest country in Black Africa.
Furthermore, Nigeria has attracted a larger stock of private direct foreign investment than any other African ruled nation. The examples of multinational oil corporations are Shell, Exxon-
Mobil, and BP. The source of Nigeria’s wealth and power is oil. Nigeria’s petroleum industry was developed by the international oil companies, of which Nigeria recently acquired majority ownership. Therefore, the main objective of this paper is to relate the mode of operations of the multinational oil corporations to the domestic crude oil economy, and to discuss policy options for maximizing economic development of Nigeria through the industry. The theme of the discussion is that the economic policies and problems of Nigeria cannot be explained without reference to the role and powers of the multinational oil corporations. These multinational oil corporations constitute the pivot around which most facets of the oil industry revolve. The activities of these multinational oil corporations are positively related to economic growth, such as employment generation and increase in oil worker’s wages. The question then becomes: Does the multinational oil corporations direct foreign investments contribute to the economic growth of Nigeria? In view of the findings in the available literature; therefore, the study hypothesizes that there is a positive relationship between multinational oil corporation direct foreign investments and economic growth.
THE NIGERIAN ECONOMY AND THE OIL SECTOR
The oil industry started in the mid 1850’s when Edwin Drake discovered oil in Pennsylvania.
But the history of the oil industry in Nigeria dates from the early 1900’s. The British colonial
Government shortly after the creation of Nigeria as a legal entity started the first geological survey of the country. In October 1960, when Nigeria became politically independent, the
Nigerian oil industry was made up of two oil companies: Shell-BP Petroleum Development
Company limited established in 1938; and Mobil Exploration Nigeria Limited established in
1955. Prior to 1955, Shell-BP was the only oil company in Nigeria producing crude oil.
Since it is a British owned company, and the British were the colonial power in Nigeria, oil policy and administration were in British hands. The 1960’s and 1970’s are characterized by the increasing importance of petroleum exploration as the fastest growing sector of the
Nigerian economy at the expense of the traditionally dominated agricultural sector. In 1974, when Nigeria had the highest crude oil production level, six of the major seven world oil companies operating in one form or the other were responsible for 93% of the total crude oil production. The Royal Dutch-Shell company and the British Petroleum Company based in
Great Britain, coordinate for the purposes of crude oil production to form the Shell-BP producing Development Company of Nigeria Ltd. This company was responsible for over
60% of the crude oil production between 1973 and 1975. The independent companies are responsible for only 10% of crude oil production in Nigeria. The remaining 30% goes to other major international oil companies operating in Nigeria. Therefore, the major
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European Journal of Social Sciences, Arts and Humanities Vol. 2, No. 2, 2014 international oil companies are responsible for about 90% of the country crude oil production.
The Nigerian government acquired 55% of the equity share of each of the companies producing crude oil in Nigeria. The actual day to day running of these firms is in the hands of the foreign firms. However, it is the federal government of Nigeria that decides on the country’s crude oil output, a decision that is in most cases based upon the “OPEC” policy of limiting output. Most of these major companies are vertically integrated; and the bulk of the crude oil share is sold back to these companies. For instance, the three largest crude oil producers in Nigeria: Shell-BP, Gulf and Mobil, buy over 50% of the country’s share from
“NNOC” (Nigerian National Oil Corporation) which markets Nigeria’s oil. It can therefore be concluded that the oil companies functionally manage and control these enterprises. It should then be the ultimate objective of the country to gain full control of the industry because of its strategic position for economic development as well as the domestic economy’s heavy dependence on it.
The Nigerian economy historically is characterized by its diversity in production. At least six major crops provided foreign exchange and export items. However, since the mid-1960’s oil has become the pre-eminent commodity in the Nigerian economy. It has displaced agriculture and tin mining as the major source of export and revenue earnings. Production of agricultural produce during the 1960’s and 1970’s continue to grow, although at a much slower rate than the production of petroleum. In fact, GDP for agriculture was ₦3123 million, and ₦1899 million for petroleum mining in 1970. However, by 1974, GDP for agriculture was ₦3531 million which was outdistanced by GDP for petroleum mining by
₦5671 million. And the two important factors that contributed to this transition were the oil boom which induced accelerated urbanization. People were drawn from the farm areas into the cities in search of jobs and other social benefits growing out of oil related enterprises.
Secondly, government workers began to be paid substantially increased salaries. These salary hikes played havoc with farm labor costs due to an inability to find labor; and its high cost if found led to the neglect of farms.
The life wire of the Nigerian economy today depends largely upon the petroleum industry.
At the beginning of the decade 1961-1970, Nigeria derived ₦8.6 million from the oil sector in form of petroleum profit tax, royalties, mining rent, permits, license fees, import duties, company taxes, payments for use of power supplied, etc. In 1963, the percentage contribution of petroleum to government revenue was only 4.3%; four years later, this figure rose to 16.1%. The Nigerian civil war interrupted production and therefore, reduced the amount of revenue accruing from the sector. The end of the Nigerian civil war in January
1970 brought renewed optimism to Nigeria and its business community. The 1970’s were momentous for the international oil industry. Significant strides were made by the oil producing states. At this time, Nigeria adopted a participation policy which is basically a non-financial demand, but speaks to the issue of ownership. Government participation in the oil industry is the acquisition of equity and management in oil companies producing in that country. It is a joint venture with government and the company as partners and co-owners.
The purpose of participation policy is to provide opportunity for the transfer of skills, technical knowledge, and business know-how to indigenous personnel. Its ultimate aim is the assumption of control and ownership of the oil industry by the host country. And in keeping with its participation policy, the Gowon administration established the Nigerian National Oil
Corporation, Decree No.18, April 22, 1971. The Nigerian National Oil Corporation was created as the government’s arm to implement participation in the petroleum industry. In
1971; Nigeria became a member of OPEC (Organization of Petroleum Exporting Countries), thereby, committing itself more to a unified position with other exporting countries. With the
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European Journal of Social Sciences, Arts and Humanities Vol. 2, No. 2, 2014 stagnated agricultural export, and the deteriorating terms of trade between agricultural exports and industrial exports; petroleum came to boost the foreign exchange earnings of
Nigeria. Government revenue from petroleum increased tremendously. Oil production has created conditions which have reduced emphasis on agricultural export production, and at the same time it has placed greater emphasis on domestic food production. Oil exports have completely displaced agriculture as the main source of foreign exchange. Oil exports have brought about balance of payments surpluses and dramatically strengthened Nigeria’s external reserve position. Finally, the production of oil has brought about internal developments such as increased urbanization, a huge jump in government social and defense expenditures and rapid development of manufacturing industries. These developments in turn account for sharply rising personal incomes in the modern sector which, given the high income elasticity of demand for food among the workers in that sector are translated into increased food demands. The oil sector’s total contribution has risen very rapidly in recent years so much so that the sign of the overall balance in the economy depends largely on what happens in this sector. The tremendous influence now exerted by the oil sector on our foreign account presupposes a large inflow of foreign exchange through this sector. The facts show that the sector has been accounting for an increasing share of total inflow of foreign exchange over the years. In 1963, only 7.7% of total foreign exchange was traceable to the oil sector. By 1970, this proportion had increased to 35.2%. In 1974, a peak of 90.9% was reached. It can be observed very clearly that Nigeria’s foreign exchange earning has come to depend almost entirely upon petroleum. Therefore, it can be said that the oil sector is the most important single institutional variable in the determination of the country’s account with the rest of the world.
The petroleum industry can easily be classified as being capital-intensive and therefore very much limited in directly absorbing labor. In 1970/71 fiscal year, 6,455 Nigerians were employed in the exploration aspect of the industry, 31% of them were unskilled employees;
36% were skilled employees; 13% belonged to the clerical and secretarial category. The rest were in either professional, supervisory or management posts. The extent to which the growth of the economy depends on a particular sector can be measured by that sector’s contribution to the GDP growth rate. But it should be noted that the fact that the petroleum sector’s contribution to the GDP growth has increased steadily over the years does not necessarily mean that its share of the GDP growth rate has also increased.
LITERATURE REVIEW
The search of the literature pertaining to the focus of the paper namely, “the impact of multinational oil corporations on the development of Nigeria’s economy” became in essence a review of the available books, pamphlets and documents on the subject. The initial theoretical and empirical literature on the effects of Foreign Direct Investment (FDI) focused on the direct impacts of the multinationals such as additional capital brought into the country, the creation of jobs, the effects on the balance of payment, and so on (MacDougall, 1960).
However, since then, the research on FDI effects has increasingly acknowledged that technological, organizational and managerial spillovers on the local firms probably represents the most influential role of MNCs in host country development. The literature on MNC and local firm interaction essentially revolves around spillovers and linkages. Blomstrom and
Kokko (1997) acknowledged that spillovers from FDI are essentially positive externalities from the presence of MNCs on the local economy of the host country. Dunning (1988) argued that since a MNC often is profoundly different from a non-MNC (local firm) in terms of technology, capital, organizational and managerial capabilities, and international market
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European Journal of Social Sciences, Arts and Humanities Vol. 2, No. 2, 2014 access, there is a potential for significant spillovers on the local economy and local firms.
Also, Rugraff and Hansen (2009) stated that spillover can happen through indirect means (for example spillover on local competitors) or it can happen through direct means (for example spillovers through subcontracting, outsourcing, licensing, franchising, and so on).
Many authors have argued that direct interaction – typically labeled linkages will facilitate spillovers. And Hirschman (1958) has made it clear that lack of linkages in the developing economy leads to lack of industrial development. It is generally assumed that from a developmental perspective, linkages between MNCs and local firms are better than no linkages, and the more and deeper linkages are, the better it is for the host economy
(Altenburg, 2000; Scott-Kennel and Enderwick, 2005; Hansen et al., 2006). Wilkins (1998) stated that MNC appeared to foster broad linkages in the host economy by creating industries that supply the MNC and by inducing forward industries to use the MNC output as inputs, the so-called crowding-in effect of FDI. Also, it has been argued that some MNCs may be
‘developmental’ in the sense that they have the creation of linkages as a key component in their strategy (Altenburg, 2000). Also, Odozi (1995) and Obadan (1982) argued that the activities of multinational corporations are beneficial to recipient nations because it allows for the inflow of foreign exchange and new technologies, and it generate employment and enhance the income of the recipient countries through taxation and payment of royalties.
Some studies have found a positive relationship between multinational corporation foreign direct investments and economic growth in Nigeria. Obinna (1983), Ayanwale and Bamire
(2001), Aseidu (2003), Akinlo (2004), and Bakare (2010) found that there is a positive relationship between multinational direct investment and economic growth in Nigeria.
Brown (1962), Obinna (1983) and Bakare (2010) using an empirical analysis found a positive relationship between MNC direct investment and economic growth in Nigeria. However, studies done by Endozien (1968), and Adelegan (2000) using unrelated regression model, found a negative relationship between MNC foreign direct investment and output growth in the Nigerian economy. Therefore, it becomes imperative that the impact of the multinational oil corporation direct investment in the Nigerian economy must be isolated in order to test whether the relationship is positive or negative.
METHODOLOGY
The purpose of this study is to discuss the impact of multinational oil corporations on the development of Nigeria’s economy. Time series data were used for the estimation and they are all secondary data. And the data were obtained from the Central Bank of Nigeria (CBN) and the national Bureau of Statistics (NBS). The model is represented by an algebraic equation. However, to derive consistent, unbiased, and efficient estimators of the structural equation, the hypothesis was tested using ordinary least square (OLS) regression technique.
And to test the significance of the policy variables, statistical tests such as the F-test, t-test, and the Durbin Watson statistics were used. In order to test the relationship among the policy variables in the equation developed; it was necessary to assume that their coefficients are the estimators of the population parameters. It was also important to ensure that the explanatory variables in the model are independent; meaning that they are not correlated among themselves and they do not influence each other. The test of significance approach was used in testing the statistical hypothesis in this study.
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European Journal of Social Sciences, Arts and Humanities Vol. 2, No. 2, 2014
MODEL SPECIFICATION
The study adopts a model based on a modified neoclassical production function where multinational oil corporation foreign direct investments (FDI) is taken as an input in the production function. Therefore; the main focus of the empirical analysis is to ascertain whether or not multinational oil corporation Foreign Direct Investment (FDI) has positive or negative impact on the economic growth of Nigeria. From the above formulation, a simple linear reduced form model can be derived from the conventional supply behavior based on the theory of profit maximization as follows:
Y = f(K, L, FDI) (1) dY/dK > 0; dY/dL > 0; dY/dFDI > 0
Therefore; structurally, output growth can be expressed as a function of production inputs and other exogenous shifters in a collapsed reduced linear form as:
Y = β ₀
+ β
₁ K + β ₂ L + β ₃
FDI + Uᵢ (2) where,
Y = Gross Domestic Product
K = Capital stock
L = Labor
FDI = Multinational oil corporation Foreign Direct Investments
β ₀
= constant factor
β ₁
- β
₃
= the regression coefficients of the explanatory variables in the equation under investigation.
Uᵢ = Error term
For the relationship among the parameters in the behavioral equation, the hypothesis is specified as follows:
H
₀
: β
₁ , β ₂ , β ₃
> 0
Hₐ: β ₁ , β ₂ , β ₃
< 0
On theoretical grounds, most of the literature review done expects the parameters to take positive signs. Thus, there is a positive relationship between Gross Domestic Product (GDP) growth rate and multinational oil corporation foreign direct investment.
EMPIRICAL RESULTS
The estimate of the production function is summarized below:
Y = - 1074434 + 6.06K + 0.03L + 20.84FDI
(-0.43) (7.55) (0.35) (3.72)
R² = 0.97; F = 271.77; DW = 2.23
The study used a time series data from 1981 – 2009 to analyze the impact of multinational oil corporation direct investment on the growth of the Nigerian economy. The coefficient of multiple determination R²; stood at 0.97 (97%) which means that the explanatory variables: multinational oil corporation foreign direct investment (FDI), capital stock (K), and labor (L) accounted for 97% of the total variations in the dependent variable, Gross Domestic Product
(GDP); which is a good fit.
The production function exhibits satisfactory results in terms of correct signs and statistical significant of the explanatory variables. The Durbin Watson statistics is approximately 2.0, suggesting the absence of first order serial correlation. It also suggests that no important
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European Journal of Social Sciences, Arts and Humanities Vol. 2, No. 2, 2014 variable has been omitted from the theoretical specification of the model. It also shows that the output elasticity’s of capital, labor, and multinational oil corporation foreign direct investment were 6.06, 0.03, and 20.84 respectively. In order words, over the study period, holding capital and labor inputs constant, a 1 percent increase in multinational oil corporation foreign direct investment (FDI) input will lead in average to about a 20.84 percent increase in output growth. As a result, output is increased and productivity growth is achieved over the study period in the Nigerian economy. The model also showed increasing returns to scale with the sum of the coefficients summing up to 26.93; doubling the inputs would more than double the output. The statistical result of the multinational oil corporation foreign direct investment (FDI) at the 5 percent level means that the hypothesis that the FDI is positively related to output growth cannot be rejected.
CONCLUSIONS
The oil industry is heavily dominated by a few multinational corporations and therefore
OPEC is a necessary organization to strengthen the bargaining position of the oil exporting countries. Nigeria entered the oil economy in 1970, and her foreign exchange earnings and government revenues have come to depend upon this source. The proportion of the GNP accruing from it is just about 11%, and it absorbs an insignificant proportion of the country’s labor force.
Revenue maximization has to be based upon OPEC policies. These involve common pricing policy, equity participation, oil sharing and setting up of national oil corporations. Increased activity in all facets of the oil industry – exploration, crude oil production, crude oil refining and marketing has to be speeded up. Also, policy should be shifted from export of raw materials to that of finished products. The basic need approach should also be emphasized.
All these policies are necessary to take the advantage of the oil revenue to develop the economy. Oil is a depleting resource and the upsurge in oil revenue may be after all transitional – the oil revenue cannot continue forever. Therefore, the policies that will maximize the long run benefits from petro-dollars have become of paramount importance to
Nigeria. And such, long run maximization of benefits involves translating the petro-dollar into such investments that will form a solid foundation for sustained economic development so that in the long run, the economy can continue to prosper without the oil money.
RECOMMENDATION
From the foregoing presentation, it is obvious that the petroleum industry continues to be an enclave in the Nigerian economy. Although Nigeria has been depending on export of petroleum for deriving over 80% of her foreign exchange, the proportion of the GNP coming from the sector remains small and the labor absorptive capacity remains also negligible. Oil as we all know is a depleting resource and suppose the oil reserves are exhausted without sufficiently developing the Nigerian economy. There is a great need to integrate the oil sector into the whole economy. This means that the Nigerian economy needs to be restructured. It is the policy issues related to these problems that we now direct our attention.
The policy issues involved are of two parts: the first part concerns those policies that aim at maximizing the oil revenue in the short run; while the second part deals with those policies which aim at translating that oil revenue into economic development.
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European Journal of Social Sciences, Arts and Humanities Vol. 2, No. 2, 2014
The current policies for maximizing the oil revenue are tied to the policies of “OPEC”. In
June of 1971, Nigeria became a member of OPEC, thereby committing itself more to a unified position with the other exporting countries. Since Nigeria has become a member of this great organization; the policies will be discussed in relation to the organization. OPEC as an oligopoly is necessary in order to bargain effectively with the oligopoly of the multinational companies.
Since the past five decades, the prices of raw materials in developing countries have been deteriorating as a result of the strong bargaining power of the multinational corporations.
And on the other hand, the prices of imports into the developing countries have been soaring up. With the above facts, any policy implementation of the OPEC or any other similar cartel if any to raise prices of their product in order to get even with the cruel situation that the advanced countries had perpetually kept the developing nations supposedly not to be considered too bad. The most outstanding of OPEC’s achievements since its inception in
1960 was the huge price increase in 1973, in which the price of crude oil was raised from
0.84K to 7.67K per barrel. Even at this point, the price increase as felt by popular opinion in developing countries was long overdue. At this present time, prices are still not stable. The situation is such that each party in the bargaining process is reviewing strategies in order to tilt the situation in its favor. And since Nigeria is solely dependent on oil for a great part of its revenue, then the collapse of the oil price would cause wild fluctuations in government revenues. Therefore, it will be necessary for policy of revenue maximization to be complemented by a policy of revenue stabilization. Accumulating huge revenues in foreign countries cannot guarantee such stabilization. And most of the countries in which the reserves are kept are themselves suffering from high inflation rates with the ultimate consequence that the gain accruing from the interest payment on these reserves may not be able to compensate for the loss of value on the reserves through inflation, and not to mention the loss through devaluation. Nigeria will be better off if such funds were utilized in establishing some factories in which only 97.5% of the cost is met from the revenue of the factories. Hence, the employment generated, the experience acquired by the workers, etc., may more than compensate for the 2.5% loss. The long run solution is therefore to develop the domestic economy. Nigeria need not keep more than the minimum funds necessary for financing the country’s imports in the short run.
An important policy among the OPEC members is equity participation. As we have already said, government participation in the oil industry is the acquisition of equity and management in oil companies producing in that country. At the time of its inception, Nigeria had 55% in all the oil companies operating in Nigeria. But it still has to be understood that the minority shareholder functionally controls and manages the affairs. The “NNPC” (Nigerian National
Petroleum Corporation) has been handling the marketing of Nigerian’s share of crude oil.
With more oil producing countries entering the declining world oil market, with the attendant competition, it may become increasingly difficult for Nigeria to sell her share of oil at reasonable prices. A greater involvement is necessary if it will involve launching a full scale operation in the refining and marketing ends of the industry. This will require a well charted oil policy by the government, a dynamic leadership and a vast expansion of the NNPC. The policies relating to greater involvement will require building of large refineries in the country to supply ECOWAS (Economic Community of West African States) countries. The present situation of importing petroleum products shows bad planning of the petroleum industry.
Policy should be geared towards domestic processing of a larger part of Nigeria’s crude oil and must be geared towards domestic market. Building large refineries that will cater at least initially for West African markets may be a sound economic policy of integrating the sector
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European Journal of Social Sciences, Arts and Humanities Vol. 2, No. 2, 2014 in the whole economy. This will also be in harmony with the spirit of the ECOWAS. It can later venture into distant markets in Europe, and some other African countries outside West
Africa. Equally important is utilizing the bulk of the oil money to develop local sources of supply of goods and services. Perhaps, the most important of this today is agriculture. The important policy issue is that the oil money should be made to circulate into the agricultural sector of the economy instead of being allowed to recycle back into the cash flow of the multinational corporations in their home countries. The industrial sector is also important.
The Nigerian industrial base has to be expanded, and both local and foreign technology should be employed to expand the industrialization of the sector. Social technology should be seriously encouraged. The overriding objective is to develop the economy, develop even the level of consumption of oil and gas and expand agricultural output to be able to sufficiently cater for domestic needs.
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