Between Foreign Direct Investment (FDI) and Outsourcing: Which Policy Strategy Will Enhance the Competitiveness of the

Nigerian Rice Sector?

*Animashaun, J.O., Ojehomon, V.E.T., Muhammad-Lawal, A. and Amolegbe, K.B

Department of Agricultural Economics and Farm Management, University of Ilorin, Nigeria

*Corresponding Author contact: reals4u@yahoo.com; +234-80-38550618

BACKGROUND• The choice of which trade model to used in

achieving the goal of self sufficiency in the Nigerian rice sector presents a very daunting Conundrum

• Should it be a free and open trade that encourages importation, or

• A restricted trade model with stringent conditions on importation and which rely exclusive on local production to meet with demand ?

• To further compound this, evidences from previous rice trade policies ranging from zero-restriction, partial and full restriction do not provide sufficient appealing evidence on which pathway to tread.

• First, during the trade restriction era, avenues were created that facilitated the proliferation of illegal and sub-standard rice smuggling rice into the country (due to porous borders).

• This led to a loss of huge revenue (tax evasion) to the government, consumption of sub standard rice products by consumers and a further disincentive to local producers due to the uncompetitive price tha such rice was offered in the market

• Second, unrestricted trade liberalization on the other hand is a subject of intense debate. As it rarely brings about equal welfare gains among participating asymmetric countries

• Quite interestingly however, a globalized world economy may not always portends a bad omen for Developing countries (FAO, 2002) as it can in most cases, enhance technology transfer and productivity increase in the sector.

• And two major offshoots of such collaboration can be vertical FDI and international outsourcing.

• In the Nigerian rice sector, such global collaboration has brought in major rice importers into establishing milling, inputs procuring and value addition activities into the country

• The key difference between FDI and international outsourcing is that of ownership and control (Goswami, 2011; Grossman and Helpman, 2003).

THE RESEARCH PROBLEM• As shown by previous studies, it is not the amount of investment

that matters, but rather the recognition of which arrangement will facilitate the much needed technology transfer for increased productivity.

• In view of the different partnering arrangement that may come from foreign sourcing, it instructive to understand which of these will ensure technology spillover to the local producers, enable local capacity development through skills upgrading and enhance welfare

• Given this, this study has 2 objectives• First establish the yield gain required from local production to

achieve self sufficiency in the rice sector from 2014-2023; and• Second, compare the prospective benefits attributed to both the FDI

and international outsourcing arrangements in the Nigerian rice sector

METHODOLOGY• The study area is Nigeria• Secondary data sourced on previous local rice production, rice

sectoral growth rate and population growth rate of the country in 2013 from published sources from USDA were used for this study.

• The study modeled future rice demand (2014-2023) as an increasing function of population growth rates of 2.5% and 3% respectively and holding all other factors constant.

• For local rice production, estimates were projected using the average sectoral growth rate of 3.25% from 2011 to 2013 (USDA, 2013), and 3% and 4.25% respectively

• The difference between the projected consumption and production trends for the years under review were used in estimating the gain required from local production.

RESULTS AND DISCUSSION

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Estimated Average consumption

Average production estimates

Deficit

Estimated growth rate to meet defict

• The study observes that given the current growth practices upon which estimates were based, the local sector has to increase by an average of 90% per annum over the next 10 years in order to meet with projected consumption in the country.

• The required investment to sustainably raise production level may not be fully met from local source alone, hence, the need for facilitating alternative investment and partnership source.

• Such guaranteed global partnership may offer a win-win situation for both the investor and the host nation.

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Welfare comparison of FDI and Outsourcing

• As a change from FDI equilibrium to the outsourcing steady state occurs,• First, there may be an exogenous increase in the efficiency as a result of

increase in the quality and quantity of skill requirement in the basic stage of production in the host country (note outsourcing is known to employ more skilled labour than FDI).

• This is based on the assumption that the subsidiary is less efficient and less skill intensive and hence a regime change to outsourcing will facilitate training and skill acquisition of the local producers (Grossman and Helpman, 2004).

• Furthermore, at low levels of development of a host country, when the availability of human capital is also short, it benefits the host country to have FDI as this will increase the local skill level.

• However, with time, as its skills level grows then it is welfare improving to host outsourcing contracts.

CONCLUSION

• This study concludes that: • First, given the current growth practices upon which

estimates were based, the local sector has to increase by an average of 90% per annum in order to meet with projected consumption in the country.

• Second, it suggests that local productivity can be enhanced through the identification of strategic partnering arrangements and support that will enable technology transfer and training of local producers in the rice sector of the country.

• Furthermore, it suggests that depending on the rate of initial skill level of the host country, both FDI and outsourcing will lead to a better welfare gains as measured by the theoretical upward shift in the productivity of local producers.

• However, if the country has a low level of human capital and skill level, it favors her to intitlally seek for FDI as this may be more beneficial; and

• On the other hand, as the skill level gets upgraded and if the domestic consumption of the product is above the threshold defined, then, the host country certainly gains from outsourcing contracts rather than FDI as its assists in upgrading the local content capacity through technology transfer and training of local producers to meet up with international competitiors and thereby, satisfying the local demand for rice.

• RECOMMENDATIONS:• Setting up attractive investment environments and the formulation of

sound domestic and macroeconomic policy that would make the country an attractive hub for foreign investors who would be interested in setting up outsourcing factory in all the value chain activites of rice production in the country; and

• though it is not immediately clear how to go about testing the relative strengths of these implications in a real-life sceneriors, future studies could however, with appropriate data, validate the predictions associated with the FDI and outsourcing in the rice sector in Nigeria.

 

• ACKNOWLEGMENT• Dr Goswami, A.G (World Bank) for

allowing permission to some useful materials

• THANKS FOR LISTENING.• MERCI • GRATIAS