THE IMPACT OF FOREIGN DIRECT INVESTMENT ON NIGERIAN ECONOMY (2000-2006)
ABSTRACT
With the advent of the third millennium the pace of globalization has continued to accelerate. One important economic consequence of globalization for developing countries has been the massive and unprecedented inflows of foreign Direct investment during the final decades of the last 20th century.
Indeed, during the last decades of the last century; private capital flows wrested primacy of place from public flows; seizing the pre-eminent position as the source of foreign investment and development finance for developing countries.
However, the Nigerian Economy has been experiencing epileptic foreign Direct investment flow in the form of investment beginning from the dawn of globalization which has over the years not able to fill saving and foreign exchange gap as expected.
This study examines the empirical relationship of the main impact of foreign Direct investment in Nigeria. A simple ordinary least square Regression method is specified for the project with scope 2000-2006. This shall be analyzed and relevant conclusion drawn from the result.
Theoretical framework was laid down for evaluating expected result of regression. The empirical evidence strongly reveals that one period lagged foreign Direct investment, Gross Domestic products, inflation rate, openness of the Economy and lending interest rate are the key variables of FDI in the period 2000-2006.
By and large, the later part of the study involves detail empirical analysis of the econometric method of estimation viz; The Ordinary least Square Regression method, following as well as policy recommendation and conclusion of the entire study.
CHAPTER ONE
INTRODUCTION
BACKGROUND TO THE STUDY
The progressiveness or retardness of any economy of the world is anchored on the attainment of sustainable economic growth and development which invariably and undoubtedly depends greatly on the level of foreign investment inflows.
Foreign direct investment inflows are the main engine of growth in mostly newly industrialized economics (NIES) of the world. At the turn of the present century, privates foreign capital mostly flowed in the form of indirect investments from Europe to the underdeveloped countries.
Such capital flowed to low income countries in the 1920s in the form of direct investment mainly into production for export, very little of it went to manufacturing for the home market. But since the Second World War, over half the private investment has been foreign direct investment but has been concentrated mainly in the coppers electric, energy etc. Only a small percentage has gone to manufacturing and distribution.
The indispensability of foreign Direct investment to the growth and development of both the developing and developed countries cannot be over emphasized indeed, the massive and unprecedented inflow of foreign direct investment in the last decades of the 20th century is an important economic consequence of globalization and liberation during the period, the penetration, breaking and dismantling of barriers to trade, capital flows across national frontiers have been ubiquitous.
Hence, the growing integration of markets and financial institutions coupled with increased economic integration has indeed been the magnet for foreign direct investment.
According to GIWA (1997) in Obardan (2004) investment to a depressed economy is just like a blood transfusion to an anaemic patient. As Giwa further stressed without investment, Income generation will be the decline as old assets and industries wear out not replaced or renewed.
Investment therefore in every economy can be classified into domestic savings of households, retained profits of business firms and budget surplus of government and foreign direct investment that is financed from external source.
The above classificatory will not be complete without further splitting of foreign private investment into three major components which are: Foreign portfolio investment Official foreign investment. Foreign direct investment
Empirical studies have shown that the fast growth rate f the newly developed countries of Asian and Latin America is as a result of their hosting of about 90% of the world’s foreign direct investment in 1997, for instance, developing
Asian countries received 20% Latin America and the Caribbean 14% and Africa 1%, unfortunately, there is a skewness of the flow of foreign investment such as that of sub-sahara Africa countries, North Africa and the middle East have been the last recipients.
In the case of Nigeria, although the countries possesses a high potential for attracting foreign direct investment, she has not been able to attract the required amount phi’s ugly trend is not unconnected with economic instability evidenced by using inflation, interest and exchange rate volatility arising from fiscal dominance (Central Bank of Nigeria).
Other notable constraints on foreign direct investment inflows to the country include poor infrastructural facilities and the high external debt burden similarly, the incessant social and political instability insecurity of life is and properties tend to undermine Nigeria’s effort in attracting foreign direct investment.
The country however has had to rely upon term loans, especially bilateral and multilateral loans in order to accelerate her development. This has led to adverse consequences of sharp deterioration and the external debt servicing problems which have surfaced since the mid 1980’s.
It should be noted that for a developing country such as Nigeria, the flow of foreign direct investment will not only be significant in rising the productivity but will also reduce unemployment due to the labor force that will be employed by foreign direct investors.
Moreover foreign direct investment provides access to foreign knowledge helps overcome the exists between the capital importing and capital exporting countries Nigeria’s quest for foreign direct investment was informed by the need to augment the nation’s local capacity and of course, bridge the savings, foreign exchange and still gaps so as to reposition Nigeria in the community of nations. In Nigeria is more efficient and has stronger effect.
Foreign Direct investment (FDI) has been defined by the United Nations as investment in an enterprise located in one country by effectively controlled by residents of another country.
Accordingly FDI refers to investment made to acquire lasting interest in an enterprise operating in an economy other than that of the investment is the distinctive feature of multinational enterprise hence a theory of the foreign Direct investment is also a theory of multinational enterprise as an actor in the world economy (Hennart, 1982).
Foreign Direct Investment close not only mean the transfer of capital, but as a result of the extension of enterprise there is also the flow of technology and entrepreneurial skills and in more recent cases, management practices from the income country to the host country.
Foreign Direct Investment is growing faster than world GDP and world trade, thus showing the rising importance of FDI, (New York United Nations 1991).
The report by the United Nations (1991) also states that since the early 1980’s FDI Outflow have grown three times faster than export and four times faster than export and four times faster than world output. According to Feldstein (2000).
Several factors reflect the rising importance of FDI in the international economy. These are: International flow of capital reduces the risk faced by owners of capital by allowing them diversify their lending and investment.
The global interaction of capital can contribute to the spread of best practices in corporate governance accounting rules and legal traditions.
Foreign Direct investment ‘’FDI’’ allows for transfer of technology. In addition to the above, FDI also promotes competition in the domestic markets of the host country. It also provides finance to bridge the savings gap. Umare (1981) also states several benefits of foreign Direct Investment to include:
Supplementing domestic entrepreneurship and expands it by example and association of domestic individuals with local affiliates of foreign firm. Foreign Direct Investment also aids the development of a nation labour force through training.
Domestic consumers also benefit from foreign direct investment. When the incoming investment is reducing in a particular industry, consumers may gain through lower product price. If the investment is product improving or product innovating, consumers benefit from better quality products or new products.
One of the greatest benefits of FDI to recipient countries is the access to foreign knowledge that private foreign investment provides. This knowledge helps to overcome managerial and technological gap between the developed (industrialized) and developing countries.
The United Nations Conference on Trade and Development (UNCTAD, 1999), findings reveal that FDI continues to increase at a global level as multinational corporations (MNC) integrates their business operations through out the world.
Nigeria, which is the focus of this study, is no exception to developing countries that desire FDI. A country richly blessed in both natural and human resources She has been identified as having great potentials for attracting foreign investment.
These potentials include a large size of market due to its population (over 140 million people) natural resources and also a variety of mineral resources which include tantalite, kaolin mica, barley bitumen and a number of others. Nigeria has been identified as the second largest foreign direct investment recipient among low income countries.
The major source of foreign investment into Nigeria has been from the Western Europe, United States and the United Kingdom. In spite of the obvious significance of FDI to the Nigerian economy particularly the industrial sector only a small contribution has made by concerned scholar.
It is believed that the empirical analysis of FDI in the various sectors of the economy will bring out clearly their nature, pattern and important determinant thus permitting adequate policy measures to increase the inflow of foreign investment. Consequently the need for this study is to ascertain the impact of foreign Direct investment FDI on Nigeria economic growth.
STATEMENT OF THE RESEARCH PROBLEM
In spite of the myriad of incentives created by the government over the years, the performance of foreign direct investment in Nigeria has not been encouraging in terms of the in-flow rate. The crux of this is to find out the main impact of FDI on Nigeria economy.
The statement of the research problem for this study therefore arises from questions such as what is foreign direct investment flows; what is the nature of foreign direct investment; what are the available strategies and measures to promote foreign direct investment in Nigeria.
There is the issue of volatility of foreign direct investment in many of the open developing countries including Nigeria. The concern is that government is handicap as regards the policies responses and adjustment to those booms and burst pattern of foreign direct investment inflows.
Surprisingly, there is limited research study on the impact and policies responses to volatility. Again, governments efforts aimed at attracting foreign capital have not been successful. Despite the plethora of incentives the performance of foreign direct investment is still unimpressive and indeed disappointing. Hence, the general level of foreign direct investment in Nigeria is still low.
The problem now is that there is no clear understanding of the problem of low and declining foreign direct investment “FDI” inflows and the constraints on the country’s investment climate. In other words what are the main factors that influence foreign direct investment in a country like Nigeria?
Identifying the various factors determining capital inflows is a prerequisites for designing effective polices and the diagnosis of these problems facing Foreign Direct investment inflows is the first step towards finding a lasting solution to Nigeria’s poor economic performance, hence the statement of the research problem cannot be downplayed
OBJECTIVE OF THE STUDY
The key objectives behind this our study is to:
Find the relationship between foreign direct investment and Nigeria economic growth. Find the impediments of foreign Direct investment The causes of instability of Nigeria foreign Direct investment their determinants and impacts on the economy.
The necessary recommendations on the steps the government and policy makers would take towards rekindling and sustaining the growth of foreign Direct investment in Nigeria will be proffered. To empirically examine the role of foreign direct investors on Nigeria economy.
1.4 RESEARCH HYPOTHESES
In the light of the introduction, the following hypotheses are formulated. Its important we know that hypotheses are logical speculations based on the available information. We hypothesize in the null and alternative hypotheses format Ho and H1 respectively.
(a) Ho: b1 = 0 foreign Direct Investment has no significant contribution to the growth in Nigeria.
H1: b1 /0 Foreign Direct Investment contribute significantly to the growth in Nigeria.
(b) Ho: b2 = 0 High inflation rates would not reduce inflow of Foreign Direct Investment.
H1: b2 /0 High inflation rate would reduce inflow of FDI into the economy.
(c) Ho: b3 = 0 low interest rates does not encourage FDI and hence retards Economy.
H1: b3 / 0 low interest rates encourages FDI and therefore spur up the growth of the economy.
Ho: b4 = 0 fair exchange rate does not allow the inflow of FDI.
H1: b4 /0 fair exchange rate does not allow the inflow of FDI.
(e) Ho: b5 =0 Openness of Economy does not affect the contribution of FDI to the economy.
H1:b5 /0 Openness of Economy have influence on the contribution of FDI to the economy.
(f) Ho: b6 =0 Gross Domestic product is not a function of Foreign Direct Investment in Nigeria Economy.
H1: b6 /0 Gross Domestic product is a function of Foreign Direct Investment in Nigeria. The bs (b1 to b6) represent the different parameters associated with the different variables that would be addressed or considered and the above hypotheses are designed to facilitate investigation into the problem and are subject to testing as used below:
SIGNIFICANCE / RELEVANCE OF THE STUDY
The importance of knowing the major impacts of foreign direct investment in Nigeria cannot be over-emphasized. In this study,
it is very important as it would enable policy maker, to examine to what extent certain explanatory variables explained what happens to foreign direct investment in Nigeria and hence forth policy makers will have the foresight to better cushion the unpleasant effects of fluctuations in foreign direct investment inflows in Nigeria.
This study will add to the tools used by economists in making decision on how to influence foreign direct investment inflows in Nigeria even students are not left out since it helps them to broaden their knowledge about the nexus of foreign direct investment and it’s impact.
In addition, given the unprepossessing growing rate of Nigeria economy coupled with myriad of problems in the country the study is particularly important in discovering if the levels of
Foreign Direct investment inflows have any bearing on the poor state of the economy. This also charts a new course of the inflation and the implementation of the appropriate and necessary policies that will act as inventories to foreign investors and hence accelerate economic growth in Nigeria.
SCOPE OF THE STUDY
This study will cover Nigeria. It would concentrate on the geographical domain of Nigeria though some comparative studies of some developing countries of Asia, North America and Africa would be briefly looked at. The study will deal with the impact of foreign direct investment on Nigeria economy examined with reference made to other component of foreign investment when necessary.
To capture the major impacts of foreign direct investment inflows in Nigeria substantially and make statements that are unbiased, a period of 7 years encompassing January 2000 to December 2006 will be considered and will subsequently serve as the time horizon for the study.
Data will be sourced from Central Bank of Nigeria statistical Bulletin, National Bureau of statistic (NBS) publications, the Nigeria economic society (NBS) publications financial and economic reviews, textbooks, International publications by eminent scholars and International Monetary Fund (IMF).
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LIMITATIONS OF THE STUDY
Due to the projection of this study and the disappointing nature of Nigeria foreign direct investment inflow profile, the study basically intend to have an overview analysis on the main impacts of foreign direct investment on Nigeria economic growth. No study is devoid of limitations and this is not an exception.
In the course of carrying out this study, there is the inability to source for primary data or verify the data used and this is occasioned by time and resources constraints.
Thus, the study will rely on secondary sources of data from publications of different national organizations (like central banks of Nigeria, National planning commission) and international organizations (like international monetary found “IMF”).
The data and information are not consistent with the researcher other academic obligations which further exerted pressure on the financial and extra-time, which are invariably limited to carry out an effective review of data and information necessary for the study.
In spite the travail, the researcher went through, the positive impact cannot be wiped out in creating fast growth in the economy.
DEFINITION OF TERMS
For the sake of clarity, concepts that will be commonly used in the study are briefly examined below:
INVESTMENT: Investment is a key component of aggregate demand and National product of a country. It is defined as real gross aggregate capital information as well as the act of producing goods that are for immediate consumption. In other words, investment refers to capital expenditures of real tangible.
DOMESTIC INVESTMENT: It refers to real gross domestic capital formation. In this regard, investment is viewed as being financed from internal resources in domestic savings. This is what makes it different from foreign investment or specifically Foreign Direct Investment “FDI”.
ECONOMIC GROWTH: According to kindle Berger, Economic growth means more output, while economic development implies both more output and changes in the technical and institutional arrangement by which it is produced.
It is a linked concept that relate to the quantitative sustained increased in the country’s per capital or income, accompanied by expansion in labor force consumption capital and volume of trade.
ECONOMIC DEVELOPMENT: This is a broader concept as it is taken to mean growth plus change. It is a multidimensional process involving Social Structures, popular attitudes and national institutions as well as the acceleration of economic growth.
FOREIGN INVESTMENT VOLATILITY: This refers to functions in foreign investment inflows. This term reflect the cumulative on external capital inflows, which seems to feed upon themselves during booms and recessions.
THE IMPACT OF FOREIGN DIRECT INVESTMENT ON NIGERIAN ECONOMY (2000-2006)
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