Project Materials

CHAPTER ONE

INTRODUCTION

1. BACKGROUND OF THE STUDY

Investment spending makes a direct contribution to economic activity because an investment is the most volatile component of GDP. Investment plays a vital role in the long run and short-run growth. It links the present with the future. Investment is part of overall financial planning. If we have some savings, we will try to invest to maximize return.

According to Stiglitz (1993), the investment can be broadly defined as the acquisition of an asset with the aim of receiving a return. It can also be defined as the production of capital goods used in future production. However, there are two broad types of investments. They are a public investment and private investment.

Public investment refers to investment by the government. When government expenditure creates positive production externalities focused on enhancing innovation and research and development and/ or stimulating the accumulation of private capital, we say that these expenditures are productive. It is generally assumed that public investment in infrastructure; education and health belong to this category. In these cases, public investment is said to crowd-in private investment.

Public investment in basic infrastructure can be an essential precondition for capital accumulation in the private sector (Swaby, 2007). Crowding-out may occur when additional public investment requires raising future tax and domestic interest rate, or if the public sector produces investment goods that directly compete with private goods (Phetsavong and Masaru Ichihashi, 2012).

In addition, the utilization of additional physical and financial resources, which would otherwise be available to the private sector, may also depress private investment (Blejer and Khan, 2010, Aschauer, 1989).

The crowding-out effect could also occur when the distortion of public sector is too large. In order to finance a rising capital spending, the government needs more financing which in turn generates higher interest rates; therefore, minimizing the private sector’s ability to access to monetary markets (Phetsavong and Masaru Ichihashi, 2012).

Nonetheless, the impact of public investment on private investment is a matter of empirical investigation. Apart from public investment, private investment may bring technology and create employment and help to adopt new methods of production while enhancing productivity by bringing competition in the economy.

Thus, with rising macroeconomic uncertainties such as inflation, investment such as FDI needs to grow at a faster pace in poor countries, because it plays a crucial role in providing much needed macroeconomic stability in these countries. Nevertheless, African’s economy remains weak and some of the African countries, for example, South Sudan and the Central African Republic, face severe domestic problems such as political instability, macroeconomic policy issues, and social conflicts that hold growth back.

The effects of investment on economic growth are of two folds. First, demand for investment goods forms part of aggregate demand in the economy. Thus, a rise in investment demand will, to the extent that this demand is not satisfied by imports, stimulate the production of investment goods which in turn leads to high economic growth and development.

Secondly, capital formation improves the productive capacity of the economy in a way that, the economy is able to produce more output. Further, investment in new plants and machinery raises productivity growth by introducing new technology, which will also lead to faster economic growth (Ipumbu and Kadhikwa, 1999).

Theoretically, the contribution of investment to economic growth has been invariably assumed to be positive. However, the relationship between them is a matter of empirical investigation. For example, Barro (2014), and Levine and Renelt (1992) using cross-country data to test the relationship between public investment and economic growth fail to produce robust statistical results linking public investment and growth.

Similarly, Warner (2014) points out that on average the evidence shows a weak positive association between public investment in both the short-run and long-run. The foreign direct investment brings technology and creates employment. It helps to adopt new methods of production and enhances productivity by bringing competition in the economy.

Foreign direct investment also introduces to novice management and organizational skills and explores hidden markets in the economy. It reduces the barriers in the adoption of technology and brings improvements in the quality of labor and capital inputs in the host economy.

Moreover, although international organizations recommend developing countries to rely primarily on FDI because they stimulate economic growth more than other types of capital inflows, (Nunnenkamp and Julius Spatz (2012), Rafique et al (2013) finds that FDI adversely affects economic growth while domestic investment has a positive effect on economic development  in Nigeria.

Indeed, the link between FDI inflows and growth is far from being firmly established once endogeneity problems and the heterogeneity of host economies are taken into account (Nunnenkamp and Julius Spatz (2012). Therefore, the effect of FDI on economic growth remains ambiguous. The role of foreign direct investment on economic growth has been hotly debated in the literature.

Some studies are of the view that foreign direct investment contributes positively to the growth of the economy (Adegbite and Ayadi, 2011; Koojaroenprasit, 2012; Adeleke et al, 2014; Ali and Hussain, 2017), while some are of the view that FDI only contributes small and it is not significant (Akinlo, 2012; Louzi and Abadi, 2011). However, the attributes of FDI in any economy of the world cannot be over-emphasized.

Foreign direct investment (FDI) refers to an investment made by an investor either corporate bodies or individuals in a country other than the domestic country of origin of the investor in creating a business or buying an asset in the country. John, (2016) opined that foreign direct investment is seen as a process of moving technology and capital from a nation either developed or developing countries to another nation.

Farrell, [2008] opined that foreign direct investment refers to the package of technology, capital, management, and entrepreneurship that the firm uses to operate and provide goods and services in a foreign market.

In Africa, Nigeria is the third host economy for FDI, behind Egypt and Ethiopia. Some of the investing countries in Nigeria are the USA, United Kingdom, China, the Netherlands, and France (UNCTAD, 2018).

Nigeria’s FDI flows in 2017 dropped by 21% to reach 3.5 billion USD which could be a result of political instability, lack of transparency widespread corruption and poor quality of infrastructure (UNCTAD, 2018). However, this study tends to re-examine the impact of investment on economic development in Nigeria.

1.2 STATEMENT OF PROBLEM

It has been acknowledged that reaching the high level of economic development and high growth rates is one of the most important goals of developing economies like Nigeria. The role of private sector in bringing about economic growth has equally been noted, yet it appears that no study in Nigeria has shown the direction of the relationship between both variables. Lack of knowledge on the causal relation between private sector investment and economic growth may result in ineffective economic policies on the private sector activities.

The fluctuations in private sector investment in Nigeria have been a serious concern. In spite of the measures adopted by the Nigerian government, private sector investment, over the years remained low which tend to impede economic growth in the country.

It has however been found that a major problem is that the government is so much concerned about policies to boost private investment without much knowledge on the factors that could influenced the effect of the private investment on economic growth in Nigeria. Private investors will flourish only in a supportive environment of cost reductions, with reasonable level of economic stability.

Among other things, Ibenta (2005) noted that foreign investors are exposed to currency risk and it is this risk that is making many foreign investors to divest from Nigeria economic scene since the introduction of the foreign exchange market. With the inclusion of exchange rate in the model, the study will access the truism of this study in Nigerian context.

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine investment and economic development in Nigeria. Other general objectives of the study are:

1. To examine the impact of Private Investment on Economic development
2. To examine the impact on Public Investment on Economic development
3. To examine the impact of Foreign Direct Investment on Economic development
4. To examine the relationship between investment and Gross Domestic Product in Nigeria
5. To recommend solutions that will help boost investment opportunities in Nigeria

1.4 RESEARCH QUESTIONS

1. What is the impact of Private Investment on Economic development?
2. What is the impact on Public Investment on Economic development?
3. What is the impact of Foreign Direct Investment on Economic development?
4. What is the relationship between investment and Gross Domestic Product in Nigeria?
5. What are the recommended solutions that will help boost investment opportunities in Nigeria?

1.5 RESEARCH HYPOTHESIS

H0: There is no significant relationship between investment and Gross Domestic Product in Nigeria.

H1: There is a significant relationship between investment and Gross Domestic Product in Nigeria

1.6 SIGNIFICANCE OF THE STUDY

The study will explore the impact or effectiveness of investment on Nigerian economic development. Though the scope of study will be limited to the different types of investment, it is hoped that the exploration of this will provide a broad view of the operations of investment in the nation.

It will contribute to existing literature on the subject matter by investigating empirically the role, which the domestic investment plays in the economic growth and development of the country.

The main importance of this study is expected to expose the extent of growth and development of Nigeria economy resulting from openness of the economy, private, public and foreign investment which the country has aspired over the years. The study will also help in the design of relevant policy that will promote development and growth.

1.7    SCOPE OF THE STUDY 

The study is based on impact of investment on economic development in Nigeria.

1.8 LIMITATION OF STUDY

Financial constraint– Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint– The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS

Domestic investment: This is an investment in the companies and products of someone’s own country rather than in those of foreign countries. Domestic investment is the measure of physical investment used in computing GDP in the measurement of nations’ economic activity. This is an important component of GDP because it provides an indicator of the future productive capacity of the economy.

Economic Growth: Is the increase in the goods and services produced by an economy, typically a nation, over a long period of time. It is measured as percentage increase in real gross domestic product (GDP) which is gross domestic product (GDP) adjusted for inflation. GDP is the market value of all final goods and services produced in an economy or nation.