Assessing Production Output And Productivity Increases Business Essay

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Host countries production output and productivity may be increased by Foreign Direct Investment (presence of MNEs) through improved allocation of resource, increased competition and expansion of local capabilities through transfer of technology or knowledge (Ito 2000). The extent of the transfer of technological knowhow towards local capability expansion is depended on if the MNEs introduces superior organisational practises or technologies and if this technologies spills over to and is absorbed by local suppliers and customers, the local workforce and local rival firms (Belderbos 2000).

Most LDCs enforce a local content requirement (LCR) guideline on multinational enterprises (MNEs) in order to create opportunities for transfer of knowledge and technology to local suppliers, workforce and perhaps, rivals. Albeit, MNEs in LDCs prefer importing intermediate inputs from their home country or from foreign suppliers of these inputs, than to source those inputs from local suppliers equipped with obsolete technology. However, the 'local content' of the host country mandates the MNEs to purchase a fixed proportion of its intermediate inputs from local suppliers.

Nigeria is regarded by many nations as the 'giant of Africa'. This assertion is partly due to the large deposit of natural resources in the country including oil and gas, bitumen, iron-ore, coal and a host of others. Oil is a major source of energy in Nigeria and the world in general. Oil and gas represents the mainstay of the Nigerian economy and plays a very important part in determining the economic and political fate of the country.

In spite of the huge contribution of oil income to the economy, bulk of the expenditure in this sector is shipped out to foreign suppliers of intermediate inputs over the decades due to ignorance on the part of the past governments of the country. The 'Nigerian Content' was established in 1999 to help develop local capabilities in the Oil and gas industry and to ensure that bulk of the annual expenditure of the government totalling over $10 billion is recycled within the economy.


Technological superiority, better managerial practices and the ability to exploit economies of scale makes it possible for MNEs investing in a previously unexplored country to compete with local firms even though the latter are usually more familiar with local consumer preferences and business practices (Blomstro¨m and Sjo¨ holm 1999). These 'ownership advantages' of MNEs constitute a scarce knowledge in the developing countries needing to be improved.

Some researchers argued that 'knowledge' is a public good and it is therefore easily transferred to recipients. Knowledge is characterised as having the features of a durable public good (Nelson (1959) and Arrow (1962) in Lim 2009). This literally informs that the knowledge produced by a Multinational operating in a particular country is easily 'transferred' or borrowed by another party say: local suppliers, workforce, partners or rivals. However, some arguments suggested that knowledge spillovers are not easily acquired. They argued that knowledge comes at a cost as the recipient must invest resources in order to absorb knowledge spillovers Cohen and Levinthal (1990).

'Absorptive capacity' is a boundary to the quantity and speed of knowledge that a firm can absorb. Without the capacity to identify and absorb knowledge, there can be no spillover. According to Cohen and Levinthal (1990) the degree of technology and knowledge transferred depends on the capacity of the recipient to recognise and absorb this knowledge. Without the capacity to

The Oil and Gas industry depends on new innovation and up-to-date technology for exploration. Most of this technology is imported into Nigeria for implementation. The industry represents an opportunity for Nigeria to grow its technology development capabilities. In order to develop local technology in the oil and gas sector, the federal government of Nigeria established the Nigerian content so as to localize much of its huge annual expenditure within the oil & gas industry and improve the 'Absorptive capacity' of the local players in this sector.

The Nigerian content strategy is first to ensure that existing local capacity is sufficiently patronized and by effect improving this capacity, before supplementary capabilities and fresh industry players are invited to build extra local capacities.


The Nigerian Oil and Gas industry is the largest industry in Nigeria and the highest contributor to her Gross domestic earnings. Nigeria oil and gas industry came into existence in the 1930 when Royal/Dutch Shell (the sole concessionaire) started exploration in Nigeria's onshore areas, primarily the Niger Delta region. By 1972, Nigeria's onshore and shallow waters oil production had reached 2 million barrels per day. In 1995, Shell discovered the massive offshore Bonga field that led to a move from onshore to offshore operations in Nigeria (Klueh et al 2007). Nigeria's focus is today on its offshore producing regions.

The end of the Biafran war in 1970s coincided with the upswing in the world oil price, and an opportunity was it for Nigeria to reap instant riches from its oil production. Nigeria joined the Organization of the Petroleum Exporting Countries (OPEC) in 1971 and established the Nigerian National Petroleum Corporation (NNPC) in 1977; a state owned and controlled company which is a major player in both the upstream and downstream sectors.

Daily crude oil production in Nigeria is limited by its OPEC quota which averaged 2.25 million barrels per day in 2008 (Approx. 832.5 total for 2008). Nigeria joined the ranks of oil producers in 1958 when its first oil field came on stream producing 5,100 bpd. After 1960, other foreign companies (MNEs) got exploration rights in onshore and offshore areas adjoining the Niger Delta.

Oil and Gas production and export play a dominant role in Nigeria's economy and account for about 90% of her gross earnings. This dominant role has pushed agriculture, the traditional mainstay of the economy, from the early fifties and sixties, to the background. The crude Oil reserves have been on the increase since 1971 through the boom period of late 1970s to present. See Figure 1.

Figure 1

Source: World Bank: The Nigerian Project Agenda

In view of the importance of the Oil and Gas industry to the growth of the economy, the Nigerian government through the Nigerian National Oil and Gas Corporation, launched the Nigerian Content requirement in 1999 and set target of 45% and 70% by 2006 and 2010 respectively.


For decades, oil was extracted from Nigeria's land but bulk of the support inputs, which would have created opportunities for growth of local skills, technology transfer were sourced from foreign firms. Prior to 1999, every equipment manufacturing, repairs, maintenance, engineering and design was done in foreign countries. Estimates made by the NNPC in 1999 showed that Nigerian companies received less than 5 percent of the annual expenditures made by oil companies operating in the country accounting for a very small share of the benefits from oil and gas expenditures made in the country.

The government in 1999 moved to improve local content in the Nigerian oil and gas industry (Nigerian Content). The Local Business Development/Global procurement Unit was established through joint efforts by Chevron Nigeria Limited and the NNPC. This scheme integrated activities relating to (i) the actual award of contracts to Nigerian firms, (ii) the farming out of oil fields to local Nigerian oil companies, (iii) facilitating technology transfer and (iv) holding Local Content Development fairs.

Another initiative to promote local content development was the setting up of the Onne Oil and Gas free zone in 1997. Since its inspection some 90-100 companies have located in this free zone and a cluster of expertise is developing, in addition of thousands of job opportunities for local residents.

Nigerian Content is the quantum of composite value added or created in the Nigerian economy through the utilization of Nigerian human and material resources for the provision of goods and services to the Oil and Gas industry within acceptable quality, health, safety and environment standards in order to stimulate the development of indigenous capabilities.

The driving force of the Nigerian Content requirements: is to promote a structure to ensure full involvement of Nigerians in Oil and Gas activities without compromising standards in order to encourage growth of indigenous capacity; promote value adding by employment of local raw materials and human resources for production of goods and services to the Oil and Gas industry; and promote stable quantifiable and sustainable growth of Nigerian content. 

Great progress has been made in the execution of the Nigerian Content Development (NCD) programme. There has been a considerable boost in the quantum of work allocated to indigenous suppliers and contractors. This has principally been achieved through the NCD efforts to facilitate the execution of any work that can be executed in Nigeria or by Nigerians is precisely specify in the Nigerian content scope in the 'Invitation To Tender' (ITTs) before they are issued. Find detailed description of major achievements (completed and ongoing projects) in Table 1

Table 1



The effect of the Nigerian content development literally is expected to be felt primarily within the Oil and Gas sector but the vigorous pursuit and effective implementation of the policy would be felt by the entire economy particularly as Oil and Gas is primarily the major source of income to the economy.

The policy has been implemented to a large extent and the achievements are evident as detailed in Table 1 above. However, if forward and backward linkages are established with other business sectors as shown in Figure 2 below, it will have significant returns in the following areas of development:

• Increase in direct and indirect employment generation in the Industry

• Growth in the employment opportunities in the manufacturing and service sector

• A large percentage of government annual expenditure of $10 - $15 billion retained in the Nigerian economy rather than being shipped out to foreign countries thereby boosting Gross Domestic Product (GDP) and National Product (GNP) as fewer inputs (materials, labour and services) are being imported while the larger part is being sourced locally. See GDP growth trend in Table 2 and Figure 3 since the inception of the Nigerian content.

• Substantial revenue for FGN through taxes at all levels within the 'Value Chain'

• Increased business efficiency across all sectors as standard is set for operations at all level of production.

• Increased capacity utilization in the manufacturing and service sectors.

Figure 2

Source: World Bank: The Nigerian Project Agenda

Table 2

Source: World bank Group- Country Unit staff data

Figure 3.

• 'Upgrading' within the value chain is possible as suppliers can get better and acquire knowledge to move up the chain


In spite of the progress made by the implementation of Nigerian content towards building local capability and advancement in technology, there are a number of challenges which are critical to the survival of the sector, the success of the Nigerian content development policy and the economy as a whole.

It is logical to claim that infrastructure plays a critical role in economic development. First, they serve as intermediate inputs to production, and thus changes in their quality and quantity affect the profitability of production, and invariably the levels of income, output and employment. Second, infrastructure services raise the productivity of other factors of production (Kessides, 1992). Lee and Anas (1992) in a study of 179 manufacturing establishments in Nigeria found that the impact of infrastructure deficiencies of all types was consistently higher for the small firms.

Infrastructure in Nigeria has been in a devastating state. This includes electricity, water, transport and communication etc. The government expends so much capital annually on improving the country's infrastructure by awarding contracts focused at reversing the current state of the country's infrastructure but the impacts are only seen and read on paper while the residents still awaits a turnaround in future.

One explanation to this is bribery and corruption; nepotism and favouritism as a significant portion of the contract were awarded to companies (some less experienced) in which government officials have interest. Halliburton bribery and corruption case is an example of serious corruption activities in Nigeria with the help of government officials (Ribadu, N. 2009; AIT 2009: see Video links on references)

Although, several anti-corruption bodies have been set-up and aggressive 'clean-up' of the corrupt is being carried out.

Nigeria is one the most political unstable countries in the world and the recurrent unrest in the Niger Delta region (Oil rich region of the economy) has been a barrier to production of oil and gas and by implication the effect is felt by all stakeholders in sector ranging from the Multinationals, local and foreign suppliers, government, local and foreign consumers etc.


Although the implementation of the Nigerian content towards building a sustainable local capability is quite commendable, there are still (a lot) areas for constant improvement.

The key players in the oil industry should be directed to establish design centres of international standards in Nigeria to train and groom local engineers as this will further speed knowledge transfer and local capability building.

Infrastructure development should be taken very critical as this affect every aspect of the economy and its development. This includes investing in the educational sector thereby moving towards improving research and development.

Extensive training should be organised for local firms in collaboration with the major players in the sector, universities and research institutes as this will to assist in the areas of skill acquisition and development. Funding should also be made available to local firms where necessary.