LITERATURE REVIEW AND THEORETICAL FRAMEWORK

 

CHAPTER TWO

LITERATURE REVIEW AND THEORETICAL FRAMEWORK

2.0 INTRODUCTION

The importance of literature review to all research works cannot be overemphasized. It help the researcher to know how others have written on the areas related to his/her topic and make the researcher seen where gaps occur, so as to make contributions to fill them.

As far as this chapter is concerned it’s going to look at the general concept of foreign policy as well as the Foreign Direct Investment (FDI) literatures by different ideological perspective of scholars. Foreign Policy is one of the wheels with which the process of international politics operates. Foreign policy is not separated from the national policy; instead, it is a part of it. It consists of national interests that are to be furthered in relation to other states. On the other hand, Foreign Direct Investment (FDI) is the investment that is made to acquire a lasting management interest in an enterprise and operating in a country other than that of the investors.

2.1 CONCEPTUAL DISCOURSE ON FOREIGN POLICY

Development of Nation-states and increasing interactions among them has resulted into the formation of foreign policy in modern times. Establishment of United Nations and process of decolonization that has liberated many states into sovereign entities have further provided impetus to interrelationships among states.

There are many definitions of foreign policy as there are interested scholars and writers. There is no universally satisfactory definition of the term, they have certain common views. Foreign policy of any country deals first with the preservation of its independent and security, and second, with the pursuit and protection of its economic interest.

In the words of Northedge (1986) foreign policy is viewed as interplay between the outside and inside”. This definition suggests that foreign policy is a reaction to external stimuli while reflecting on domestic realities. It is also referring to the general principles by which a state. Governs its reactions to the international environment.

Moreover, Frankel (1973) sees foreign policy as “a dynamic process of interaction between the changing domestic demands and the changing international environment”. This definition sees foreign policy consisting of decisions and actions which involve, to some appreciable extent, relations between one state and other. It is a dynamic process involving interaction between the domestic and the external environment and in accordance with the national interest of the states concerned.

Thus, foreign policy is the analysis of the actions of a nation-state toward the external environment and the domestic conditions formulated. It is the essential instrumentality by which states influence or seek to influence the external world and to attain objectives that are in conformity with their perceived national interest.

According to Modelski (1962:6-7) “Foreign policy is the system of activities evolved by communities for changing the behaviour of other states and for adjusting their own activities to the international environment... foreign policy must throw light on the way in which states attempt to change, and succeed in changing the behaviour of other states”.

Therefore, the behaviour of each state affects the behaviour of every other state in one form or the other, directly or indirectly, with greater or lesser intensity, favourably or adversely. The function of foreign policy is to try to minimize the adverse effects and maximize the favourable effects of action of other states. Foreign policy is not only to change but also to regulate behaviour of other state by ensuring continuity of their favourable actions.

Notwithstanding, foreign policy is a complex and dynamic political interaction that a state gets involved in pursuing relations with other states and entities outside the purview of its own jurisdiction. As Frankel puts it “Foreign policy consists of decisions and actions which involved to some appreciable extent relations between on state and others” (Frankel, 1968:1). It implies that foreign policy involves set of actions by the force working within states borders and intended towards forces existing outside the country’s borders. It is a set of tools employed by the state to influence exercise of law making power be other states as well as actions of non-state actors outside the purview of its jurisdiction it comprises the formulation and implementation of a set of ideas that govern the behaviour of state actors while interacting with other states to defend and enhance its interests.

Gibson (1944) says “Foreign policy is a well-rounded comprehensive plan based on knowledge and experience for conduction the business of government with the rest of the world. It is aimed at promoting and protection the interests of the nations. This calls for a clear understanding of what those interests are and how far we hope to go with the means at our disposal. Anything less than this falls short of being a foreign policy”. (Gibson, 1944:9).

In the words of Padelford and Lincoln (1967), Foreign policy is the key element in the process by which a state translates its broadly conceived goals and interest into concrete courses of action to attain these objectives and preserve its interests. (Padeltford and Lincoln, 1967:197). In view of such definition, it is very pertinent to know that, foreign policy consists of achieving the national objectives through the available national means by interacting with other states.

Moreover, it is as important as necessary that all nations harness their needs and resource within both their countries and outside their national boundaries. Thus, every nation as a matter of obligation, must have both internal and foreign policy. A nation’s level of involvement in various international issues is often the expression of its general orientation towards the rest of the world. Foreign policy is the sum total of the principle, the interests and objectives which a state formulates in conduction its relations with other states. All the foreign policy decisions aimed at achieving either cooperation or conflict or neutrality towards a particular state or group of states or rest of the world.

It is quite revealing from the few perceptions disclosed above that, foreign policy is a dynamic process involving interaction between the domestic and the external environment. This of course will be in accordance with the national interest of the state concerned.

2.1.1 NATIONAL INTEREST AND FOREIGN POLICY

Foreign policy and national interest are inseparable concepts in international relations, and indeed, the foundation of a states, foreign policy is her national interest which in turen directs the course of the foreign polcy. The concept of national interest has continued to play a significant role in the foreign policies of sovereign states. A state’s foreign policy is not operated in vacuum. The main policy instrument in the conduct of foreign policy is invariable the promotion and pursuit of national interest.

Morgenthau (1954:718), opined that “as long as the world is politically organised into nations, the national interest is indeed the final word in world politics”. This is to say that the starting point in foreign policy making is the national interest.

In addition to the above Morgenthau (1973:6) stated that “no nation can have true guide as to what it must do and what it needs to do in foreign policy without accepting national interest as that guide”. What it means is that, national interest is the key concept in foreign policy, and it is the nerve centre of any country’s foreign policy. No nation, no matter how lofty its deals and how genuine its desire to abide by its interactions with other states can base its foreign policy on considerations other than its own national interest.

According to Mahan (1935:1) “Self-interest is not only a legitimate, but a fundamental cause for national policy... it is useless to expect governments to act continuously on every grounds other than national interest... they have no night to do so being agents not principals”. Since every nation-states of the world has its sovereignty, people, territory and government, it is expected to have its own national interest that drives its principles and policies.

Generally, the relationship between national interest and foreign policy cannot be overemphasizes. The issue of national interest has always been a key concerning foreign policy of nations and commands great attention in international relations where it is considered as a force propelling the actions of actors. National interests are the bedrock upon which government base their foreign policy objectives; this means that foreign policies are formulated in order to promote national interest.

 

2.1.2 PRINCIPLES OF FOREIGN POLICY

According to Halilu (2015:63), every action or in action of a state actor in the international system is guided by a set of principles or rules regulating it. Therefore, it varies from state to state. Principles are platform which a country’s following policy is laid down; even though it changes at times, most of the elements guiding it remain static. Most foreign policy decisions incorporate several of principles, each principles adding its portion to shaping the final foreign policy decision.

For every independent state, in the bid to pursue its foreign policy guide jealously it sovereignty and territorial integrity. This includes respect for the state independence, protection of its citizens both home and abroad and respect for its national interest. A state can go to war or device any other mean either through diplomacy or propaganda to protect its sovereign and territory when it is threatened by any internal or external force. Upholding the sovereignty and integrity of the state is the foundation and integrity of the state is the foundation of the international state system; so in the realm of foreign policy, the sovereignty of the state is taken seriously. Upholding the sovereignty as well as the integrity of the state is an extension of the right of self-government.

Notwithstanding, every state want to maintain its pride of been capable of protecting its country from internal and external attack or aggression irrespective of its actual weakness, militarily, economically or politically. Nations that seeks to achieve a viable and succeeding foreign policy towards the actualization of national interest, should ensure capable national security and defence. National security as well as the defence of any state is the paramount element in the formulation and implementation of a nation’s foreign policy when a country cannot maintain its national security in the process of pursuing it foreign policy, it makes it vulnerable to any form of attack; this therefore could hamper with its territorial integrity.

Moreover, in international relations and practical, politics, every state’s foreign policy is guided by its interest; therefore, they tend to consider their national interest first in its foreign policy irrespective of the fact that could clash with other state’s interest. The starting point of foreign policy making is the promotion of national interest; national interest is what makes foreign policy going and foreign policy makes world politics possible. Nowadays, states could compromise their interest for the sake of peace and friendliness. Most importantly, if a state compromises its interest, it is because of another interest. The promotion and achievement of national interest is the key element in foreign policy.

2.1.3 COMPONENTS OF FOREIGN POLICY

According to Obi (2006), Foreign policy is a product of many factors and force. Some of these factors and forces are natural, while some are man-made. Also while some are permanent others are temporary. It is the sum total of these that are referred to as components of foreign policy. Rodee in Obi (1957:8). States that in devising foreign policy, a nation must consider certain fact of its existence. The frame of reference includes its geographical situation, population potential, economic endowment and ideological environment.

Breacher in Obi (1987:9) summed the components as geography, external and global environment, personalities, economic and military position and public opinion as the major components of foreign policy. Rosenau in Obi (2005) differs a bit in his own components. He listed size, geography, economic development, culture and history, great power structure alliances, technology, social structure, moods of opinion, political accountability, governmental structure, and situational factors (both external and internal).

The Foreign policy of a nation is formulated and implemented by its policy makers. The geographical characteristics of size, topography, shape and climate are important factors. A state with a sizeable territory, good climate, natural defence boundaries, arable land for food production and a shape which is compact and easier to depend is seen as possessing the necessary power potential that enables a state to prosecute independent foreign policy. The geographical location of a country, to a very large extent determines its defence policies. Also, the military strength of a nation to a large extent influences its foreign policy. Countries that are militarily strong often adopt aggressive postures on issues that feel strongly about.

Moreover, the level of economic endowment also determines the scope of relations that a nation wishes to establish with other nations. Economic power constitutes a fundamental dimension of national power in contemporary times and at present; it can be used more effectively for securing foreign policy goals Nations necessity to engage in trade with other nations reflects their economic interest. The ability of every state to pursue its foreign policy successfully defends on its economic position.

2.1.4 CONCEPTUAL DISCOURSE ON FOREIGN DIRECT INVESTMENT (FDI)

Foreign Direct Investment is a key element in this rapid evolving international economic integration, also referred to as globalization. According to the organization for economic cooperation and development (2008), foreign direct investment (FDI) provides a means for creating direct, stable and long-lasting links between economies. Under the right policy environment, it can serve as an important vehicle for local enterprise development, and it may also help improve the competitive position for both the recipient (host) and the investing (home) economy.

Foreign Direct Investment (FDI) provides an opportunity for the host economy to promote its products more widely in international markets. In addition to its positive effect on the development of international trade, is an important source of capital for a range of host and home economies. The significant growth in the level of FDI and its international pervasiveness, reflect both an increase in the size and number of individual FDI transactions, as well as the growing diversification of enterprises across economies and industrial sectors.

Large Multi-National Enterprises (MNEs) are traditionally the dominant players in such cross border FDI transactions. This development has coincided with an increased propensity for MNEs to participate in foreign trade. In recent years, it is believed that small and medium size enterprises have also become increasingly involved in foreign direct investment (OECD, 2008).

Foreign Direct Investment (FDI) according to World Economic Report (2007:245), is defined as an investment involving a long term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI) enterprise or affiliate enterprise or foreign affiliate. FDI implies that the investor exerts a significant degree of influence on the Management of the enterprise resident in the other economy or economies.

According to Morisset (2000: Vol.2481) FDI is a type of investment that involves the injection of foreign funds into an enterprise that operates in a different country of origin from the investor. Investors are granted management and voting rights if the level of ownership is greater than or equal to 10% of ordinary shares.

Foreign Direct Investment (FDI) is the process where people in one country obtain ownership of assets for the purpose of gaining control over the production, distribution and other activities of a firm in a foreign country (Moosa, 2002).

In addition, OECD (1996) defines FDI as “the objectives of obtaining a lasting interest by a resident entity in one economy (direct investor) in an entity resident in an economy other than that of the investor (direst investment enterprises)”. The lasting interest reflects the continuation of a long term relationship between the direct investor and the enterprise and a considerable level of influence on the management of the enterprise.

According to Egbo (2012), FDI is an investment made to acquire a lasting management interest in a business enterprise in a given country other than that of the investor defined according to residency. He added that FDI is a combination of merger and acquisition and new investments as well as the reinvestment earnings and loans from the similar capital transfer between parent companies and their affiliate. This is to say that, FDI is seen to play a key role in the growth and development process of developing nations, like Nigeria, whose human and material resources are underemployed or not fully employed.

According to Shiro (2008), Foreign investment consist of foreign resources such as technology, managerial and marketing expertise and capital which have considerable impact on the host nation’s production capacity. FDI occurs when a firm invests directly in the production of other facilities in foreign country in which it has effective control. It requires the establishment of production facilities abroad and on the other hand the service facilities or establishment of an investment presence through capital contribution and building office facilities.

Foreign Direct Investment (FDI) is an investment behaviour when an individual or industrial firm has expanded asset resources from one country to the other in compliance with the legislation of the host country. FDI is facilitated primarily by multi-national corporations. FDI serves as one of the engines of successful transition, mot FDI’s have market seeking and efficiency seeking motives. Findings reveal that FDI continues to increase at a global level that as Multi-National Corporations (MNCs) integrate their business operations throughout the world.

Notwithstanding, there are two major types of FDI (i.e. horizontal and vertical FDI). The horizontal FDI is undertaken when the company want to expand horizontally to produce the same or comparable goods in the host country as in the home country. On the other hand, the vertical FDI is undertaken when a country seeks to exploit raw materials, or want to be closer to the consumer by acquiring distribution outlets. The idea is to make the production process more cost-efficient by reallocating some stage to low-cost location. By establishing their own network in the host country, it is easier for the Multi-National Companies to market their products (Brackman, Garretsen and Van Marrewijk, 2006).

Moreover, Moosa (2002), expressed that, Foreign Direct Investment can take the form of Green-field investment – (the process whereby the investing company establishes new production and distribution facilities in a foreign country), Merger and acquisitions and lastly, joint venture.

2.2 THEORETICAL FRAMEWORK

For the purpose of this study, David Ricardo’s theory of comparative advantage was adopted in this work for theoretical framework of analysis. Ricardo (1817) pointed out that, the theory of comparative advantage is an economic model about the work gains from trade for individuals, firms, or nations that arise from differences in their factor endowments or technological progress.

Ricardo developed the classical theory of comparative advantage in 1817 to explain why countries engaged in international trade (Foreign Direct Investment inclusive) even when one country is more efficient at producing every single good than the other. Ricardo opined that, things being equal a country tends to specialise in, and exports those commodities in the production of which it has maximum comparative cost advantage or minimum comparative disadvantage. He further demonstrated that, if two countries are capable of producing two commodities engaged in the free market, then each country will increase its overall consumption by exporting the goods for which it has a comparative advantage while importing the other goods provided that there exist differences in labour productivity between both countries.

The central assumption of the theory postulated that, there are two countries and two commodities, whereby each country will specialise in the production of that commodity in which its comparative cost of production is the least; it also assumed that, no cost of transport as well as trade barriers.

With regards to the applicability of this theory, no nation can survive as an island of its own, it must relate with others towards the actualization of its national interest. This is to say that, the Nigerian government should design policy that can best suits the interest of its economic situation toward attracting foreign investors or multi-national companies which in turn could serve as relative advantage for both the recipient and the investing economy. Hence, the government of the federation periodically promulgated or design a policy and implement it so as to encourage Foreign Direct Investment from developed and developing countries.

Therefore, considering the central assumption of the theory, it is well-known facts that, Nigeria is a country with abundant natural resources and human capital. The Nigerian policy makers may seek to adopt clear and practical policy that can attract foreign companies thereby achieving relative advantage. For instance, a foreign company may invest or establish a firm or industry in Nigeria, such investment will serve to some extent a relative advantage for both the recipient and the investing economy. This is to say that; the foreign company could have the advantage of boosting its economy as well as the level of its development. Thereinafter, the host economy i.e. Nigeria in particular, could generate revenue which in turn leads to its economic growth and development; therein, the level of unemployment will decrease to the bearing level and per-capita income will increase among the nationals.

The Ricardian theory as explained above is very much important to this study. For, the theory explained how nations derived relative advantage which is said to be responsible for international trade relations, Foreign Direct Investment, Technical and Educational Corporations among nation-states.

2.2.1 CRITICISM OF THE THEORY OF COMPARATIVE ADVANTAGE

The principle of comparative advantage has been the very basis of international trade and economic relations. Nevertheless, the theory is not free from some defects. In particular, it has been severally criticized by Berlin Ohlin and Frank D. Graham on the ground that the Ricardian Model (theory of comparative advantage) is related to trade between two countries on the basis of two commodities. This is unrealistic because in actuality, international trade and economic relations exists among many countries trading in many commodities. The model also ignores logistic expenses, technical impediments that discourage Foreign Direct Investment between investors and determining comparative advantage in trade. This is highly unrealistic according to Graham, because logistics play an important role in determining the pattern of world trade and economic relations. Thus, the assumption of complete specialization by Ricardo’s model has been criticised and condemned by Graham in which he pointed out that, complete specialization will be impossible on the basis of comparative advantage in producing commodities in the international economic relations.

Moreover, the theory has been castigated on the other basis that, it’s unrealistic assumption of free trade and exploitation of hosting countries which resulted to unequal benefit. Whereas in reality, world trade and economic relation is not free. Every country applies restrictions on the free movement of goods from one country to another. Thus, tariff and other trade restrictions affect world imports and exports more and more, products are not homogeneous but varied. Thus, neglecting these aspects, the Ricardian theory became unrealistic and incomplete.

Nevertheless, in spite of all limitations apportioned to the theory that, comparative advantage theory has remained the basic principle of international economic relations. Despite these weaknesses, the theory has stood the test of this research thereby explaining the reflection of Nigeria’s Foreign Policy and Foreign Direct Investment.

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