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