THE DETERMINANT OF FOREIGN DIRECT INVESTMENT IN NIGERIA
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THE DETERMINANT OF FOREIGN DIRECT INVESTMENT IN NIGERIA
ABSTRACT
The study looks at the factors that influence foreign direct investment (FDI) in Nigeria from 1980 to 2007. The Cochrane Ocutt regression approach was used in the study.
According to the findings, the exchange rate (an economic issue) and political instability are important predictors of FDI in Nigeria. Domestic market size (as measured by GDP), trade openness, and inflation are unimportant predictors of FDI.
The regression model, on the other hand, demonstrated a substantial fit with an f-value of 36. 521 and an adjusted R2 of 0.93 at the 0.05 confidence level. It was also discovered in the findings that the behaviour of GDP and inflation in connection to FDI deviates from theoretical and empirical expectations of a positive and negative relationship, respectively.
The findings show that policy changes aimed primarily at effective currency rate management and low political risk will encourage FDI inflows into the country.
BACKGROUND OF STUDY
CHAPTER ONE
1.1 INTRODUCTION
Growth in neoclassical theory is caused by a rise in the amount of elements of production and the efficiency with which they are allocated. In a universe of two variables, labour and capital, it is commonly assumed that low-income countries have plenty of workers but little capital.
Domestic savings in these countries impose limits on capital formation and thus growth. Even when indigenous inputs, in addition to labour, are freely available and there is no shortage of input supply,
increasing output may be influenced by a scarcity of imported inputs on which low-income countries’ production processes are built.
International capital flows (ICF) quickly became a key source or means of increasing developing countries’ capital flow in foreign private investment (FPI). Other components include:
a. Concessional and non-concessional official flows from bilateral (e.g., developed and OPEC countries) and multilateral sources such as the World Bank and its two affiliates, the International Development Assistance (IDA) and the International Finance Corporation (IFC).
b. Commercial loans, including export credit: According to economic theory, capital will flow from countries where it is abundant to those where it is scarce.
This movement pattern will be influenced by the returns on new investment opportunities, which are thought to be higher in circumstances where money is constrained.
As a result, capital transfer will increase investment in recipient nations and provide huge social benefits. Globalisation has continued to increase since the turn of the third millennium. Many reasons, including increased privatisation and economic liberalisations,
have also driven globalisation in practically every nation on the planet in the sectors of international trade and finance. During the latter decade of the twentieth century, developing countries experienced large and unprecedented inflows of foreign capital as a result of globalisation.
However, private capital inflows (PCI) have surpassed governmental flows to become the dominant source of finance for emerging countries. According to Weitz and Lijane (1998), whereas official flows were $56 billion in 1990, compared to $44 billion in private flows, by 1996, public flows had dropped to $41 billion, while private flows had increased to 244 billion.
According to UNCTAD data, FDI inflows totaled US $400 billion in 1997 and reached an all-time high of US $440 billion in 1998 (Mallampally and Sauvant, 1999).
Despite the fact that GDP has grown more evenly distributed among recipient countries in recent years, the distribution remains unbalanced, with Asia receiving the lion’s share of FDI flows to developing nations and Africa receiving little.
According to Mallam Pally and Sauvant, the distribution of World FDI inflows among developing nations is uneven. In 1997, for example, developing Asia received 22%, Latin America and the Caribbean received 14%, and Africa received 1%.
Another perspective on the skewness of distribution can be gained by noting that in 1995, 81% of worldwide FDI flows to developing nations went to 12 countries, while 89% of total portfolio flows went to nearly the same dozen countries (Weizt and Lijane, 1998).
As a result of the growing trend of globalisation, the difficulty of attracting more foreign investment in developing nations, particularly those in Sub-Saharan Africa, has intensified in recent years.
Weitz and Lijane (1998) state. The opening of a country necessitates investment in infrastructure such as highways, telecommunications, power plants, and a financial system.
Given low income and low savings in many African nations, the investment-savings gap has grown and there is little possibility of narrowing it without the active participation of the private sector, both domestic and international.
1.2 STATEMENT OF THE PROBLEM
Nigeria is regarded as a high-risk investment market due to reasons such as poor governance and uncertain macroeconomic policies, among others. Since the country’s return to democracy in 1999, the Nigerian government has taken a number of steps to attract foreign investors.
These actions include, among others, the removal of regulations that are detrimental to foreign investment growth, the promulgation of investment laws, and overseas travels of image laundry such as the “re-branding” campaign.
Despite the abundance of incentives, the performance of foreign investment in terms of quantum in Nigeria remains mediocre and even disappointing. As a result, the following questions have been raised:
i. What are the primary factors influencing foreign investment inflows?
ii. What is the anticipated impact of foreign direct investment on Nigeria’s economic development?
iii. What is the government’s policy framework for encouraging foreign investment?
1.3 OBJECTIVE OF THE STUDY
The research specifically seeks:
1. To assess the factors that influence foreign investment in Nigeria.
2. To examine the impact of foreign investment in Nigeria.
3. To examine the trend of foreign investment inflows into the country over time.
4. To investigate the issue of foreign investment volatility.
1.4 HYPOTHESIS OF THE STUDY
The following hypotheses have been developed and will be investigated in order to provide definitive results on the determinants of foreign direct investment (FDI). The following is the study’s hypothesis:
1. H0 (Null Hypothesis): Foreign investment in Nigeria has no substantial impact on the country’s economic progress.
2. H1 (alternative hypothesis): Foreign investment inflows have a major impact on Nigerian economic development.
1.5 THE SIGNIFICANCE OF THE STUDY
Given Nigeria’s unimpressive growth rate, particularly as she strives to become one of the world’s 20th largest economies by 2020, the study will concentrate on identifying the elements that would extend and broaden the borders of investment flows in the economy.
This research will be useful for monetary authorities and authorised actors in the external sector because it will depict the situation of foreign investment in Nigeria at a glance. Academics will, without a doubt, find it beneficial for future research.
1.6 THE SCOPE OF THE STUDY
The major goal of this article is to identify the primary determinants of foreign investment in Nigeria. During the process, a specific effort is made to analyse the relationship between the policy environment and foreign investment inflows in Nigeria, as well as to explain the pattern of foreign investment flows, because it is impossible to include all.
1.8 METHODOLOGY OF THE STUDY
The data for this study will be gathered from secondary sources such as Central Bank of Nigeria (CBN) publications and statistical bulletins.
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