EFFECT OF FOREIGN DIRECT INVESTMENT ON ECONOMY GROWTH OF NIGERIA.
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EFFECT OF FOREIGN DIRECT INVESTMENT ON ECONOMY GROWTH OF NIGERIA.
Chapter one
INTRODUCTION
1.0 Background of the Study
The goal of this research is to investigate the effects of FDI on the Nigerian economy, identifying characteristics and conditions that encourage or impede growth.
Developing countries are caught in a quandary because they want foreign capital for internal economic development, but they are afraid that foreign investors (who are already said to be at the helm of some sectors of the economy) will seize complete control of the international economy and turn it into an appendage of Western economic hegemony.
However, the majority of the economic blueprints advised for developing economies agree on the importance of foreign capital. Thus, a developing country may need to identify the specific areas that must attract foreign private investment, as well as the optimal degree of foreign investment required to supplement its internal resources. This ensures a balance between economic development and economic freedom. (IMF, 2009).
Foreign direct investment has never had a greater impact than it does now in the early twenty-first century, as nations become more interconnected through commerce in goods and services, as well as the flow of money and investment.
Because of the significant benefits, most countries aim to attract foreign direct investment (FDI), which is a proven strategy for economic development.
African countries, particularly Nigeria, have joined the rest of the globe in seeking FDI, as indicated by the development of the New Partnership for Africa’s Development (NEPAD), which includes attracting foreign investment to Africa as a major component (Funke and Nsouli 2003).
According to Caves’ (1996) research, the justification for increased efforts to attract more FDI originates from the notion that FDI delivers a variety of benefits.
Productivity gains, technology introduction of new processes, managerial skills and know-how in the home market, employee training, international production networks, and market access are all examples.
The literature provides an agreed-upon framework definition of foreign direct investment (FDI), which is defined as net inflows of investment to acquire a long-term managerial stake (10 percent or more of voting stock) in an enterprise operating in an economy other than the investor’s.
Equity capital, reinvestment of equity, other long-term capital, and short-term capital are all included in the balance of payments. It typically includes managerial participation, joint ventures, and the transfer of technology and experience.
There are two types of FDI: inward foreign direct investment and outward foreign direct investment, which result in a net FDI inflow (positive or negative) and a “stock of foreign direct investment,” which is the cumulative total over a certain period.
The United States, the world’s largest beneficiary of FDI and thus the world’s strongest economy, exemplifies the importance of FDI in economic growth. Over the last six years, America has profited from FDI by establishing over 4000 new projects and 630,000 new jobs produced by foreign companies, totaling about $314 billion in investment.
Foreign enterprises have historically supported an annual US payroll of billion, with an average yearly remuneration of $68,000 per person (UNCTAD, 2010).
Sub-Saharan Africa as a region today relies heavily on FDI for a variety of reasons, some of which are highlighted by Asiedu (2001). The desire for FDI arises from its widely accepted benefits (Sjoholm, 1999; Obwonba, 2001, 2004).
Several African countries’ efforts to enhance their business climate derive from a desire to attract foreign direct investment. In fact, one of the foundations of the New Partnership for Africa’s Development (NEPAD) was to boost accessible capital to US$64 billion through a mix of reforms, resource mobilisation, and an FDI-friendly environment (Funke and Nsouli 2003).
TNCs from developed and transition economies have increased their investment in Africa in recent years. They contributed for 22% of regional flows from 2005 to 2008, compared to 18% from 1995 to 1999 for Chinese investors.
Malaysia, India, and the Gulf Cooperation Council (GCC) are among the most active, with Africa accounting for only a small portion of their FDI. Investors from Southern and Northern Africa have also increased their presence in the region.
These new investment sources not only present more development opportunities, but they are also predicted to be more resilient than old ones, potentially acting as a crisis buffer (UNCTAD, 2009).
Nigeria receives the highest level of FDI in Africa. According to UNCTAD, Nigeria’s FDI inflows have increased over the last decade, from USD$1.14 billion in 2001 to USD$2.1 billion in 2004, reaching USD11 billion in 2009, making the country the world’s fifteenth largest beneficiary of FDI.
As a result, since FDI is viewed as a potential tool for propelling the economy to new heights, it is only natural for Nigeria to improve its earnings by expanding its attempts to recruit more of it.
1.1 Statement of Problem
Unfortunately, most African governments’ efforts to attract foreign direct investment have proved fruitless. Despite the continent’s perceived and clear need for FDI, the situation is concerning, giving these countries little hope for economic progress and prosperity. Nigeria as a nation has not been able to properly utilise its riches.
According to a recent research, Nigeria is rapidly losing its leadership role in attracting FDI in Africa to Egypt and South Africa, who have been successful in attracting FDI in a variety of areas of their economy.
Nigeria’s poor FDI record can be further explained by the following reasons:
Uncertainty: One of the reasons why foreign investors are hesitant to engage in Nigeria, despite its great profit prospects, is the region’s relatively high level of uncertainty, which exposes businesses to substantial risks. Uncertainty in Nigeria presents itself in three distinct ways:
• Political instability: The region is politically unstable due to a high rate of war, frequent military intervention in politics, and religious and ethnic strife.
Sachs and Sievers (1998) have also claimed that political stability is a key driver of FDI in Africa. For example, the Bokoharam and Niger Delta threats have been claimed to deter investors (World Bank 2011).
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