ANALYSIS OF DETERMINANTS AND IMPACT OF FOREIGN DIRECT INVESTMENT ON NIGERIAN ECONOMY (1981-2013).
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ANALYSIS OF DETERMINANTS AND IMPACT OF FOREIGN DIRECT INVESTMENT ON NIGERIAN ECONOMY (1981-2013).
ABSTRACT
This study looks into the causes and effects of foreign direct investment (FDI) on the Nigerian economy. FDI has become a contentious and contentious subject around the world because to its critical role in closing the savings gap in Least Developed Countries (LDCs). The theoretical thesis that savings lead to investment is well-documented in literature
. Two key concerns addressing the possible role of FDI in LDC development remain unsolved. To begin, do proponents of the modernisation hypothesis truly believe that FDI contributes to economic progress in the host country?
Second, dependency theorists argue that while FDI may boost short-term economic growth, it will induce and accelerate internal distortions, ultimately depressing or even retarding the host country’s economic progress.
Based on these considerations, the study evaluated the causes and impact of foreign direct investment on the Nigerian economy, as well as the composition and pattern of FDI inflows to Nigeria between 1981 and 2013.
Using the dual gap and Solow growth models as theoretical frameworks, quantile regression analysis was utilised to investigate the behaviour of interest variables such as fiscal deficit, openness, infrastructure investment, net foreign indebtedness, and external reserves.
According to the results of the two models, all of the variables were statistically significant at the upper quantiles, implying that high GDP motivates FDI inflows to Nigeria at various levels (1%, 5%, and 10%), with the exception of external reserve, which was not statistically significant in q95 with a coefficient of 2.530.
Furthermore, the impact of FDI was shown to be statistically insignificant in q5, q25, and q50, with coefficient values of 2.0351, 1.3403, and -0.9472, respectively.
The results in the latter two quantiles (q75 and q95) reveal that FDI is statistically significant, with coefficients of -1.1307 and -8.0836 at the 5% level of significance. Finally, the composition and trend analysis revealed that FDI inflows are mostly concentrated in the mining and manufacturing sectors, whereas other sectors such as agriculture, building, and construction have yet to benefit considerably from FDI inflows.
Based on these main findings, it is advised that the government remove pre-investment rules and introduce tax concession policies to encourage foreign direct investment to these sectors.
Chapter One:
Introduction
1.1 Background of the Study
Theoretical arguments exist about the significance of foreign direct investment (FDI) in an economy, implying that FDI provides an essential source of foreign exchange earnings to supplement insufficient financing (savings) for domestic investments.
FDI also provides import substitution, which helps to cut import bills and so conserves foreign reserves, whilst investment in export promotion businesses increases the country’s foreign exchange revenues (Todaro, 1994).
According to the neoclassical school of thought, FDI bridges the gap between targeted government revenue and locally raised taxes. By taxing multinational corporations (MNCs), the government can generate financial resources for development goals.
Hansen and Rand (2006), emphasising the importance of FDI, demonstrate that it has been an effective source of boosting productive sector efficiency by stimulating economic growth and job creation.
The flow of foreign capital to rich and developing countries has remained a hot topic in literature. However, given its critical role as a driver of growth, such capital in Nigeria nearly dried up between 1972 and 1985 as a result of government actions that were perceived to be anti-foreign direct investment. The policy thrust led to a debt crisis as the government and private investors took out significant foreign loans (Anyanwu; 1998).
However, with the adoption of SAP in 1986, Nigeria began to receive a significant flow of international investment capital.
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