An Assessment Of The Impact Of Foreign Direct Investment On Nigerian Economic Growth

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An Assessment Of The Impact Of Foreign Direct Investment On Nigerian Economic Growth


Abstract


This study assess the impact of Foreign Direct Investment in Nigerian economic growth over the period of 1990-2011. Data from Central Bank of Nigeria (CBN) Statistical Bulletin was used. The Ordinary Least Square (OLS) technique was specified and used to examine the relationship between the variables which includes the Gross Domestic Product as the dependent variable, export, Exchange rate, foreign direct investment and trade openness as the independent variables. The explanatory power of the model was given by the R2 of 85.5% and was subjected to t-test and f-test to test the significance of the independent.


Chapter One


Introduction

1.1.Background of the Study

Investors’ decisions and actions globally are influenced significantly by the dictates of self-interest which suggests that capital, not only be channeled to high-yielding economic sectors but also to those that are ostensibly quick yielding economies. On balance therefore investors would spun profitable opportunities characterized by extreme competitions, market glut, unfavorable regulation, long gestation periods and opt instead for investments that yield high returns within the shortest time possible. Base on this view, investors generally migrate from one economy to another in search of better investment climate and higher returns.

This form of capital movement results in the creation of a typical investment called Foreign Direct Investment. In the opinion of Jomo (1988) Foreign Direct Investment can be explained to represent the flow of tangibles from a country abroad of capital, equipment and other production and processing facilities into a host economy. It is also defined as a long term investment reflecting a lasting interest and control by a foreign direct investors (or parent enterprise), of an enterprise entity residents in an economy other than that of the foreign investor (IMF, 1993).

Foreign Direct Investment is widely thought to bring with it into the host country a bundle of productive assets including long term foreign capital, entrepreneurship, technology skills, innovative capacity and managerial, organizational and export marketing know-how. The distinctive feature of Foreign Direct Investment is that it involves not only a transfer of resources but also the acquisition of control. i.e the subsidiary does not simply have a financial obligation to the parent company, if is part of the same organizational structure (Krugman and Obstfeld,2000). Foreign Direct Investment involves much more than the simple transfer of capital or the establishment of a local factory in a developing nation. Multinational carry with them technologies of production, tastes and diverse business practices including cooperative arrangement, marketing restrictions advertising and the phenomenon of transfer pricing. They engage in a range of activities, many of which have little to do with the development aspirations of the countries in which they operate. (Todaro, 2000).

Temle (1999) demonstrates that technical changes and technological learning which are significant components of Foreign Direct Investment represent important determinants of economic growth. Furthermore, it is relevant to add that technology is generated by Research and Development (R&D), most of which is conducted in industrialized countries making technology transfer very important for economic prosperity of countries with weak Research and Development (R&D) and innovation capacities.

Political and economic policies bothering on FDI assist immensely in stimulating the economic growth of the recipient nations Chang(2001) believes that in the 16th and 17th centuries deliberate transfer policies of King Henry viii made Britain a leading manufacturing nation. Among the hotly debated issues in development, economics is the role played presently by FDI in export performance of developing countries such as the case of East and South East Asian country.

FDI flows to Africa have expanded only marginally and are still at levels behind those of other developing countries. The region accounted for less than 1% of the global total FDI inflows in the late part of 1990s (Odenthal, 2001) while inflows to developing countries as a group increased from U.S $20billion to U.S $75billion between 1981 and 1985. Africa’s share of that inflow dropped (UNCTAD 1999).

Historically, low rates of FDI inflows to the region and Nigeria in particular are explained by hostile policies, unstable political environment characterized by civil wars and armed conflicts, lack of effective regional integration efforts, poor and deteriorating infrastructure, burdensome regulations or lack of institutional capacity to implement FDI to establish confidence.


1.2 Statement Of Problem

In recent time, the government of Nigeria has embarked on economic policies to check the flow of Foreign Direct Investment (FDI) in certain sectors of the economy. Admittedly, how to achieve rapid economic growth and development through FDI which has proved to be one of the economic problems facing Nigeria.

Therefore, this work tend to analyze critically the following:

  1. The determinants of FDI in emerging economy such as Nigeria.
  2. The impact of Foreign Direct Investment on the growth of Nigerian economy.
  3. To analyze the increase in local wage cost through payment of wages by Multinational Corporations (MNC) affiliates.
  4. To examine the importation of capital intensive and cost dates technology.

1.3 Research Questions

The following research questions have been designed as a guild to elicit reliable information for this study. They are:

  1. Does intellectual poverty production increase the attractiveness of FDI?
  2. Has the rate and volume of FDI into Nigeria increased the consumption expenditure of its citizenry?
  3. How have the Nigerian industries been stimulated by foreign technology?
  4. To which extent will the Nigerian economy depend on the foreign capital inflow?
  5. To which extent has the FDIs in Nigerian led to the diversification of Nigerian economy?
  6. How friendly is Nigeria’s trade policy and environment to FDI?

1.4 Objective of the Study

The objective of the study includes:

  1. To determine the magnitude of the impact of FDI on economic growth in Nigeria.
  2. To find out whether or not FDI has a significant impact on the growth of Nigeria economy.
  3. To examine the appropriateness and suitability of the nature and quality of foreign technology transfer on Nigeria economy.

1.5 Research Hypothesis

The following hypothesis have been formulated to determine the validity and reliability of the study.

  • H0: There is no relationship between the volumes of FDI inflows and the growth of the Nigerian economy.
  • H1: There is a relationship between the volume of Foreign Direct Investment inflows and the growth of the Nigerian economy.

1.6 Significance of the Study

Technological adoption by any country is a function of local technological capabilities which in turn are largely determined by the quality and volume of Research and Development being sponsored by foreign or parent companies. Thus, FDI appears to substitute local innovation as the technology recipient firms in the n host country becomes mere in the global chain of affiliates subject to central decision making. Therefore, this study is designed to assist the policy maker in determining the technology transfer through FDI into Nigeria. Also, the global economic circumstances permit that national economics should be integrated into global economic network and this is only possible through effective capital transfers appraised and monitored through research of this nature.
There is also need to meet challenges post by foreign product domination of internal market and this is supported by research work such as this study. The study can also be relevant in universities and research centers in Nigeria libraries, National Bureau of Statistic and investors will find this study highly useful.


1.7 Scope and Limitation of the Study

The study is restricted within the confines of the impact of Foreign Direct Investment in the growth of Nigeria economy. The time frame covered by the study is between 1990-2011. The topic is chosen because of the importance of FDI in the growth of the Nigerian economy since independence.

Limitation of the Study

In the course of this study, many problems were encountered and most of them centered on time, finance, dearth of data and poor attitude of respondents. The impact of time constraints were enormous because of the nature of programme. Financing of a project of this nature is always costly and this has been a major constraints because cost of sourcing materials, assemblage of data obtained, collected and printing constitute large chuck of fund. Also, dearth of data and poor attitude of respondents affected the early completion of the study many business organization in Nigeria do not make public their data bank for reach studies and this affects the quality of the information generated from either National Bureau of Statistics (NBS) and those released by their personal.


1.8 Definition of Terms

Assessment:

Is defined as the action or an instance of making a judgment about something; the act of assessing something or the amount assessed:an amount that a person is officially required to pay especially as a tax

Variable:

A variable is anything that can take on differing or varying variables. The values can differ at various times for the same object or person, or at same time for different object or person.

Economic Growth:

Economic growth is the increase of per capita gross domestic product (GDP) or other measure of aggregate income. Economic growth is concerned with the long run. The business cycle is the short-run variation of economic growth.

Government Expenditure:

Government expenditure is the government spending. Government expenditure is financed through a variety of methods. Governments use taxes to fund programs and expenditures. Governments engage in deficit spending where government may borrow based on future projected budgets in order to fund programs. Governments may also choose to take loans from foreign countries to finance expenditure. The main component in a government’s fiscal policy are how money is spent and from what source.

Foreign Direct Investment:

Foreign direct investment is the long term participation by one country into another country. It involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI. There are outward FDIs and inward FDIs.

Inflation Rate:

Inflation rate is a measure of inflation. It is also as the rate of increase of a price index for consumer price index. Inflation is a rise in consumer prices and increasing the cost of living. It is also the percentage rate of change in price level over time. The inflation rate is one of the most important economic forces consistently weighing on the value of a nation’s currency.


1.9 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  • Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study.
  • Chapter two highlight the theoretical framework on which the study is based, thus the review of related literature.
  • Chapter three deals on the research design and methodology adopted in the study.
  • Chapter four concentrate on the data collection and analysis and presentation of finding.
  • Chapter five gives summary, conclusion, and recommendations made of the study.

Chapter Five


Summary Conclusion and Recommendation

5.1 Introduction

It is pertinent to note that this research was aimed at examining the effect of foreign investment on the Nigeria economy, thus the topic “the impact of foreign direct investment on Nigerian economic growth”.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges associated with foreign direct investment and economic growth in Nigeria.


5.2 Summary

In summary, the findings provide evidence that suggest that there is a bi-directional relationship between economic growth and foreign direct investment to Nigeria economy. Thus, as foreign direct investment encourages growth, more growth also encourages more foreign direct investment, hence there is a kind of positive-feed-back relationship between foreign direct investment and economic growth in Nigeria.

The findings of this study revealed that there was a positive relationship between FDI and GDP during the period of 1990-2011. Though its contribution to economic growth in Nigeria was not statistically significant, the study indicated that FDI has the potential to significantly impact upon the economy. Consequently, the paper recommends the need for maintaining a steady economic growth and low inflation, increased investment in human capital development to build the stock of capital available in the country, the need to overhaul the tax and duty mechanisms to curtail widespread tax evasion, corruption and poor quality services; and the need to increase national savings and investments. These are necessary as catalysts to enhance economic growth in Nigeria.


5.3 Conclusion

Foreign direct investment has been argued by many researchers as an engine of economic growth. Obviously, the great potentials of foreign direct investment for accelerating the pace of economic progress of Nigeria cannot be overemphasized. Foreign investments cater for job creation requirements, income generation, utilize national savings productively and perpetuate the process of economic growth. Foreign direct investment has been traditionally found to help attract skilled labor, entrepreneurship, technological know-how and direct flow of foreign resources including foreign exchange. These factors augment the existing domestic resource base and promote growth when they flow into the economy.

The researcher here concludes that foreign direct investment contributes positively to economic growth in Nigeria. However, the relationships with the different sectors are different. Whereas, FDI is positively related to the oil sector, it is negatively related to agriculture and manufacturing. Also, although FDI significantly explains investment in the oil and service sectors at 1 percent level, it is only significant at 5 percent for government revenue and external block, and insignificant to the output of services sector. This means that policy makers armed with exact knowledge of the type of FDI projects and the disparate consequences on the different sectors of the local economy, can more accurately fashion out selective FDI policies with the view to attracting growth-promoting foreign investments. FDI determinant factors vary from sector to sector and across industries.


5.4 Recommendations

Having evaluated the flow of FDI in Nigeria and its impact in the Nigerian economy, the following recommendation are necessary;

  1. The government should pay more attention to the enhancement of dealings with existing investors and offer them inducements to assist in marketing local investment opportunities to prospective overseas investors.
  2. For foreign direct investment (FDI) to impact on sustainable growth and development, both the public and private sector must pursue corporate social responsibility from the public sector, the creation of competitive economy through economic policies such as deregulation and privatization should be pursued.
  3. Effort should be made by the Nigerian government to attract more foreign direct investments to the productive sectors of the economy in a way to increase output level and alleviate poverty in the Nigerian society.
  4. The Nigerian government needs to come up with more friendly economic policies and business environment, which will attract FDI into all the sectors of the economy.
  5. The Nigerian government needs to embark on capital projects,which will enhance the infrastructural facilities in which foreign investors can build on.
  6. The Nigerian government should carry out the liberalization of all the sectors of the economy so as to attract foreign investors, so that current efficiency and growth noticed in the telecommunication sector can also be enjoyed there.
  7. Finally, the Nigerian government should be able to build investors’ confidence in all Nigerian economy as lack confidence of investors can be attributed to the low inflow of foreign direct investment in the country.

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